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How do you solve a problem like an arbitral accounting error?

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As the recent case of Ducat Maritime Ltd v Lavender Shipmanagement Inc [2022] EWHC 766 (Comm) shows, a party cannot challenge an award simply on the grounds that the tribunal made an arithmetical mistake.
 
What is a party to do when an arbitrator makes "an obvious accounting mistake" in an award?

Suppose the tribunal had thought that 2 + 2 = 5 and made an award based on that error. In arbitral proceedings under English law, the disadvantaged party can apply for a correction of the award under section 57(3) of the Arbitration Act 1996.

But what if the tribunal refuses to make the correction? This issue (not that particular arithmetical mistake) was considered by Mr Justice Baker in a recent Commercial Court case of Ducat Maritime Ltd v Lavender Shipmanagement Inc [2022] EWHC 766 (Comm).

In an arbitration, under the LMAA Small Claims Procedure 2017, the owners of a vessel sought US$37,831.83 by way of unpaid charter hire, on the basis of their final hire statement.

While the charterers accepted the owner's final hire statement, they disputed certain charges including US$9,553.92 charged for inadequate hull cleaning and sought to deduct US$15,070 for the vessel's underperformance, by way of set-off and counterclaim. 

It was common ground between the parties that if the owners succeeded on every issue, they would have been entitled to their full claim of US$37,831.83; and if the charterers were successful in their defences and their underperformance counterclaim, they would have been entitled to US$6,258.35.

The arbitrator concluded that the charterers successfully showed that US$9,553.92 damages for inadequate hull cleaning were not payable, but their underperformance claim of US$15,070 failed.

The resulting award amount should therefore have been:

  • Owners' total claim of US$37,831.83;

  • Minus damages for inadequate hull cleaning of US$9,553.92;

  • Equals US$28,277.91.

Instead, the arbitrator made what was later described as "an obvious accounting mistake". He added the charterers' unsuccessful counterclaim of US$15,070 for underperformance to the owners' total claim and found the owners' total claim was worth US$53,692.66, rather than finding that the charterers were not entitled to deduct the sum from the owner's claim.

The arbitrator realised that (by his calculations) the total value of the owners' claim was greater than the amount claimed and that he could not award more than had been claimed. He mistakenly concluded that the reason for the difference in values had not been explained, but instead of seeking clarification from the parties, his solution to the problem was to limit the owners to their full claim of US$37,831.83 (rather than the correct sum of US$28,277.91). 

The charterers applied to the arbitrator under section 57(3) to correct the award on the basis that there had been "a clerical mistake or error arising from an accidental slip or omission". In their application, the charterers, unfortunately, made their own "clerical mistake" in the calculation of the 'correct' amount due to the owners, which confused matters further.

The arbitrator declined that application, stating that there was “no error or mistake in the calculations”, and later declined a second application.

The charterers challenged the award in the Commercial Court under section 68(2) of the Arbitration Act 1996 "on the grounds of serious irregularity affecting […] the award" namely "failure by the tribunal to comply with section 33", which provides that "[t]he tribunal shall […] act fairly and impartially as between the parties, giving each party a reasonable opportunity of putting his case and dealing with that of his opponent".

The charterers argued that the arbitrator did not comply with section 33 by reaching a conclusion that was contrary to the common position of the parties, and for which neither party contended, without providing an opportunity for the parties to address him on the issue.

In his judgment, Baker J concluded that when the Arbitrator "realised that the amount he thought was due to owners was more than the amount they had claimed, and that this was unexplained, he should not have proceeded to resolve the problem as he did, without giving the parties the opportunity of commenting on it. 

Had he done so, the error would have come to light. That is sufficient basis to conclude there was an irregularity within section 68(2)(a)".

The charterers also challenged the award on the basis that the arbitrator made an obvious accounting mistake. Baker J confirmed that the focus of a section 68 enquiry is on "whether there has been a failure of due process, and not whether the tribunal has got the answer right […]. Illogicality or irrationality on the part of the tribunal does not, itself, bring the case within one of the heads of section 68(2)".

However, he concluded that "a gross and obvious accounting mistake, or an arithmetical mistake of the 2 + 2 = 5 variety made in the award, may well represent a failure to conduct the proceedings fairly, not because it represents an extreme illogicality but because it constitutes a departure from the cases put by both sides, without the parties having had an opportunity of addressing it." Thus, bringing the argument back to the charterers' first ground for the challenge, i.e., failure to comply with section 33.

For a section 68 challenge to succeed, the charterers needed to show an irregularity that fell within the exhaustive list of categories set out in section 68(2), and that that irregularity had caused or will cause substantial injustice to them.

The charterers successfully argued that the mistake made by the arbitrator meant the amount they were ordered to pay was about 33% higher than what should have been ordered, by way of principal and interest. Had they been given an opportunity to comment on the way in which the arbitrator was proposing to deal with the failed counterclaim, "the Arbitrator might well have reached a different view" and this amounted to a substantial injustice. 

Baker J set aside part of the award, namely the amount ordered in excess of the amount that should have been ordered.

It is clear from this case and those referred to in the judgment, that a party cannot challenge an award simply on the grounds that the tribunal made an arithmetical error.

The party seeking to challenge the award must show that:

  • The error was not part of either party's case;

  • That in making the error, the tribunal is likely to have departed from the common grounds between the parties as to how arithmetical processes work; and

  • The parties were not given an opportunity to address the justifiability of the departures.  

  This article was authored by Yuliya Kupchenko, dispute resolution director at Fieldfisher.
 

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Areas of Expertise

Arbitration

Related Work Areas

Maritime