Compania Sud-Americana De Vapores S.A. v Nippon Yusen Kaisha

Introduction

This matter comes before the court by way of an application by Compania Sud-Americana de Vapores S.A. (“CSAV”) under section 68 of the Arbitration Act 1996 (“the 1996 Act”) to set aside parts of an Award made by arbitrators on 1 December 2008. The respondent is Nippon Yusen Kaisha (“NYK”). They were parties, with others, to two agreements which established a joint container service between Japan and the Far East and the east coast of South America. In the arbitration NYK claimed some US $786,000 as having accrued to it under the agreements prior to their termination. Only a very small part of the sums claimed by NYK were disputed. The dispute substantially concerned CSAV’s counterclaim for damages on the ground that NYK had wrongfully terminated the joint service agreements.

The arbitrators rejected all but one of NYK’s defences to CSAV’s counterclaim. However, by a majority, they allowed NYK to advance an argument that an agreement had been reached at a meeting on 5 June 2003 to terminate the second joint service agreement. This had been pleaded but CSAV submitted that the tribunal should not have allowed NYK to advance it because, after the pleading and in the light of its written and oral opening submissions and its failure to respond to what was said in CSAV’s written and oral submissions, NYK had abandoned the point. At the stage of the arbitration that the point surfaced or re-surfaced, CSAV had concluded its cross-examination of NYK’s witnesses without cross-examining on the point, and thus did not have a reasonable opportunity of dealing with the point. It was submitted by Mr Parsons QC on behalf of CSAV that allowing NYK to advance the argument in these circumstances was a serious irregularity that caused CSAV substantial injustice.

Mr Croall QC, on behalf of NYK, submitted there was no serious irregularity because NYK had not abandoned its pleaded case, and the matter relied on by CSAV made no material difference to the conduct of the hearing in that the relevant evidence was adequately tested before the arbitrators. He also submitted that there was no substantial injustice to CSAV. First, CSAV put the issues now before the court to the arbitrators who considered them properly and by a majority rejected CSAV’s complaints. Secondly, CSAV did cross-examine on the issue. Thirdly, the arbitrators (albeit by a majority) found that further cross-examination would have made no difference in any event. Fourthly, both parties put their case on the issue and all the relevant documents on that issue before the arbitrators who were best placed to determine whether NYK was entitled to advance the argument.

The evidence before the court consisted of two witness statements (dated 23 December 2008 and 12 May 2009) by Mr Kaiser of Stephenson Harwood, on behalf of CSAV, and one (dated 4 February 2009) by Mr Hodgson of Clyde and Co, on behalf of NYK.

Background

In December 1993 five companies, including CSAV and NYK, entered into an agreement for a joint container service, known as the Good Hope Express or “GEX” agreement. parties to it. In 1996 and 1998 two of the parties to the agreement, Nantai Line Co Ltd and Grindrod Unicorn Group Ltd, ceased to participate in the service. In about July 2002 another of the parties to it, Norsul S.A., ceased to participate. Thereafter CSAV and NYK entered into an agreement for a similar joint container service with Kien Hung Ltd (“KHL”). This agreement was known as the SUPERGEX or “SGEX” agreement. It was common ground in the arbitration that the terms agreed by the parties were contained in a draft pr+epared in March 2003 and that the final agreement for the SGEX service was made on or about 11 March 2003, but it had in fact commenced in the early days of September 2002, shortly after Norsul ceased to participate in the GEX service.

The SGEX agreement proved short-lived. CSAV and NYK considered KHL’s vessels had not performed satisfactorily. KHL’s financial position also deteriorated to the extent that creditors had started to arrest its vessels, and there were discussions with a number of third parties, for KHL to be taken over. CSAV and NYK started to consider ways of getting KHL to leave the SGEX and they approached other carriers to see if they would be interested in joining the service. On 12 March 2003 a takeover of KHL by Hamburg Sud with effect from the beginning of April 2003 was announced.

CSAV and NYK did not want Hamburg Sud to take over the SGEX service from KHL by stepping into its shoes. They wished to renegotiate and to enter into a new agreement with whoever would be the third party in the joint service. On 7 April 2003, only 7 months after the SGEX agreement started, both CSAV and NYK served termination notices on KHL. NYK relied on clauses 2.1 (90 days notice) and 11 (insolvency or change of control). CSAV relied on clause 11. Negotiations with Hamburg Sud followed. On 28 and 29 April there were two meetings in New York. The first was between NYK and CSAV. The second was between the two of them and Hamburg Sud. The minutes of the first meeting record inter alia that one of the points to be put to Hamburg Sud was to “confirm the current status of the termination notice”, that “NYK/CSAV sent the termination notice to KHL on Apr 7^th and the termination will be in effect after 90 days”. Those of the second meeting record inter alia that“three parties agreed the trinity agreement of SGEX should be the best choice considering of market situations, though the termination is in process”.

The negotiations and discussions continued and, as they did, it turned out that CSAV and NYK had different approaches. There were meetings on 4 and 5 June in Santiago. Messrs Kawate, Ota and Maruyma represented NYK; Messrs Bustamante and Della Maggiora represented CSAV; and there was also a representative of Hamburg Sud present. The arbitrators found (Award paragraph 9(11)) that it was at the Santiago meetings that CSAV first mentioned its understanding that if NYK did not continue the service with them they needed to give notice of termination of their relationship with CSAV. Paragraph 69 of the Award refers to the contemporaneous evidence in relation to the meetings on 4 and 5 June 2003. It states:

“The contemporaneous evidence relied on consisted of the following internal email from Mr Della Maggiora to various personnel within CSAV dated 5 June 2003, stating, inter alia, as follows:-

‘For your information, today we have agreed with NYK and KHL that the SGEX service will terminate. The phasing out must be done taking in account full compliance of 4 cycles as from the 3^rd September 2002 that give to me first sailing without KHL should be July 8^th, 2003…

… We don’t [k]now yet if we will continue operating with NYK or not, we will receive their intention soon but in the meantime we have a 6 month notice of termination which have not yet exercised nor by NYK nor by CSAV.

There was also a report of the Santiago meeting by Mr Kawate, being likewise an internal [NYK] memorandum, stating, inter alia, as follows:-

…Story of meeting on 4-5 June

- Confirmed 2 lines different positions and SGEX’s service termination on 6 July (although it has already in process)

- NYK was in a position that both CSAV/Hsud invited NYK as consortium partner. NYK declared that NYK would decide our position and advise it to both lines by 20 June …

This was followed by an email from Mr Oelckers to Mr Saito [dated 9 June] in the following terms:-

… As you [should be] aware, last Friday June 6 in Santiago, it has been agreed between KHL, NYK and CSAV to terminate the SGEX when the 4^th cycle of the current service will be finished. As per our records… the 4^th cycle will be completed with the MV Conti Bilbao V. 303SB, scheduled to sail from Busan on July 2^nd. She will be the LAST sailing of the current SGEX service and therefore we have to agree a Phase In Schedule between NYK and CSAV to replace KHL to be phase out on NB trip from “NER302N”.

In attached EXCEL file “Phase Out SGEX-Phase In NEWGEX” you will find a summary of the phase in plan to be agreed among NYK and CSAV for the NEWGHEX which we would like to comment very briefly as follows…”

It became clear that the different approaches taken by CSAV and NYK meant that an agreement between the three parties would not be forthcoming. After this was realised, NYK decided to enter into an agreement with Hamburg Sud. On 30 June 2003 it notified CSAV of this, and that the SGEX agreement would terminate on 6 July 90 days after 7 April. Disputes arose, in particular as to whether valid notice had been given terminating the SGEX agreement.

The arbitration

The disputes led to arbitration in London. The arbitrators were Mr Robert Gaisford (appointed by NYK), Mr John Colin Sheppard (appointed by CSAV) and Mr Patrick O’Donovan (appointed by the party appointed arbitrators). NYK maintained that the notice dated 7 April 2003 validly terminated the SGEX agreement as against CSAV with effect from 6 July 2003 or, alternatively, that the parties had agreed to terminate it from that date.

CSAV maintained that the notice of 7 April 2003 did not have this effect. There had been no agreement to terminate the SGEX agreement as against CSAV, only an agreement to remove KHL from the service by terminating the agreement as against it. Its position was that it was only agreed to terminate the service; there was no agreement to terminate the SGEX agreement. On this point the parties appeared to be at cross-purposes. CSAV considered that the tripartite joint service could be ended (by expelling KHL) without terminating the relationship it had with NYK. NYK appeared to regard termination of the tripartite service as the same as termination of the relationship with CSAV. CSAV also claimed that NYK was in repudiatory breach of the SGEX agreement and that it was entitled to damages for the period when NYK treated the agreement as at an end. As to the matter on which the parties appeared to be at cross purposes the tribunal, in paragraph 45 of its Award, stated that it accepted “that neither NYK nor CSAV considered that if the agreement with KHL were to come to an end, this would necessarily mean the winding up of the GEX or SGEX service but it would merely mean that these two companies, which had enjoyed a good commercial relationship over the years, would come [to] a further agreement by which the service would be continued, as they had never failed to do over the preceeding years”.

CSAV’s primary case on its counterclaim was that the right to terminate between CSAV and NYK remained subject to the GEX agreement. It argued that the GEX agreement had been put into “suspended animation” while the SGEX agreement operated and that it was revived on the termination of the latter agreement.

CSAV’s alternative case alleged that, if the SGEX agreement was the operative agreement, it had been wrongfully terminated by NYK due to a failure to give adequate notice. In particular, CSAV alleged that NYK was obliged to give 90 days notice of termination to CSAV as required by clause 2.1 of the SGEX agreement and that it had failed to do so. CSAV argued that the notices on 7 April 2003 were not, and were not intended to be, notices of termination as between NYK and CSAV ending the SGEX agreement. It maintained that the notices were served to get rid of KHL in order to ensure that Hamburg Sud would not think that it could simply step into KHL’s shoes.

CSAV also argued that no notice of termination could validly be given under clause 2.1 of the SGEX agreement until September 2003 when the minimum period of 1 year had expired, that the requirements for termination under clause 11.1 (principally insolvency or change of control) were not satisfied because some of the events had not taken place, and that the mechanism for service of the notice specified in clause 13 of the SGEX agreement had not been adopted against CSAV.

NYK’s pleaded case as to termination had two limbs. The first and principal limb was reliance on the termination notices sent on 7 April 2003. Its defence to CSAV’s counterclaim, served on 21 July 2006, states in paragraph 15(b) that “it was the common assumption between the parties that the super GEX agreement was terminated by notice given on 7 April 2003”. The second limb of the pleaded case is contained in paragraph 15(f) of the defence to CSAV’s counterclaim. This states:

“On 5 June 2003, a meeting took place in Santiago, Chile between the claimants, respondents and Hamburg Sud. At that meeting, the claimants and respondents agreed that the Super GEX service would terminate when the fourth cycle of the current service was concluded. There was a common agreement between Mr Oelckers of [CSAV] and Mr Kawate of [NKY] that the end of the fourth cycle would conclude the agreement.”

Mr Oelckers, of CSAV, in paragraph 43 of his witness statement made on 25 July 2008 stated that he had seen the pleading in which NYK alleged “that it was agreed at the meeting in Santiago on 5 June 2003 that the SGEX service would terminate when the fourth cycle was completed and that there was a common agreement between [himself] and Mr Kawate [of NYK] that the fourth cycle would conclude the agreement”. He states:

“This is incorrect. I was not even at the meeting on 4/5 June 2003 at Santiago. I did not have any agreement with Mr Kawate as alleged. The meeting was attended by Raphael and Fernando Bustamente for CSAV.”

Mr Kawate made a second witness statement on 29 August 2008. In paragraph 20 he stated that Mr Oelckers was right to point out that he did not attend the meeting on 5 June in Santiago. He states “this meeting was attended by Messrs Kawate, Ota and Maruyama and Messrs Bustamente and Della Maggiora from CSAV. This is set out in paragraph 89 of my witness statement. Our pleading is incorrect.”

NYK and CSAV exchanged their written opening submissions on 17 September. Section V of NYK’s document is “Claimant’s outline position on the issues”. Paragraphs 115-125 set out NYK’s position as to how the notices dated 7 April 2003 were valid both under clause 2.1 and clause 11.1 of the SGEX agreement. Paragraph 127 states:

“There are, in reality, three candidates for termination: (a) termination on 90 days notice under clause 2.1 (b) immediate termination under clause 11.1 (c) termination agreed to be on 90 days notice from 7^th April 2003 at the meeting on 29^th April 2003.”

The second and third candidates, immediate termination under clause 11.1 and termination agreed at a meeting on 29 April 2003 to be on 90 days notice from 7 April, were unpleaded allegations. There is no reference to a fourth candidate, that is an agreement made at the meeting in Santiago on 5 June.

The meetings in Santiago on 4 and 5 June are mentioned in the section of NYK’s document (section III) dealing with the factual background. Paragraph 73 states inter alia that “the parties were unable to agree on the terms for a 3 party consortium” and that “as a result the parties agreed to go their separate ways”. It is stated in paragraph 74 that “it was at the meeting in Santiago that the parties also agreed that the final phase of SGEX was to be the fourth cycle of the then service”. The chronology NYK provided with its written opening submissions included an entry for 4^th/5^th/6^th June 2003 stating “Agreed between CSAV, NYK and KHL that SGEX to terminate on 4^th cycle of service namely by 8 July 2003”.

Paragraph 41 of CSAV’s written opening submission states:

“At the meeting on 4^th June, CSAV and NYK reached agreement as to the best offer which they would jointly put to HS [Hamburg Sud] as to their involvement in the service. However, this proposal was rejected by HS on 5^th June and it became clear that the agreement between the GEX partners and HS was impossible. On 5^th June HS agreed that KHL would leave the service after the end of the fourth cycle – on or about 8^th July 2003.”

At the end of paragraph 41 there is a footnote. This states:

“NYK initially pleaded that on 5^th June 2003 there was a common agreement between Mr Oelckers and Mr Kawate that the end of the fourth cycle would conclude the SGEX agreement. When it was pointed out by CSAV that Mr Oelckers was not even at the meeting, it was accepted by NYK that the pleading was in error. It is therefore assumed that this allegation is no longer pursued. In any event, what the 5^th June agreement and discussions amounted to was that KHL were leaving the service and that the tri-partite SGEX service was coming to an end.”

The hearing commenced on 22 September 2008. CSAV’s legal team, Mr Parsons QC, Miss Melwani, and Mr Kaiser discussed the implications of Mr Kawate’s supplementary witness statement and paragraph 127 of NYK’s written opening submissions. The legal team also discussed this with Mr Della Maggioria and Mr Oelckers. (See paragraphs 26-30 of Mr Kaiser’s first witness statement.) Mr Kaiser’s evidence (first statement paragraph 37) is that Mr Parsons and Miss Melwani agreed specifically that Mr Parsons would raise the 4/5 June oral agreement issue and point out its absence in order to be certain that there were no misunderstandings and to give NYK a fair opportunity to resurrect the point if it had been overlooked in error.

When making his oral opening submissions on behalf of NYK, Mr Croall QC stated that he was going to “spend just a few minutes on the way we put our case, but I can do it very briefly because I have already set it out in writing”. He mentioned clauses 2.1 and 11.1 and said that the arbitrators will have seen that “what we do say about the Super GEX agreement is that there is, in effect, by 29 April, an effective agreement between all the parties that the Super GEX agreement will be terminated”. He did not mention an agreement being reached on 4/5 June.

In his oral opening submissions Mr Parsons referred to paragraph 127 of NYK’s opening submissions. He summarised the three candidates for termination and stated that if those candidates “failed to terminate the relationship… then it seems to be common ground that there would be a repudiatory breach because there would be no valid notice of termination”. He then set out why the second and third candidates were unpleaded allegations. In discussing the third one, agreement on 29 April that termination to be on 90 days notice from 7 April 2003, he stated:

“So the pleaded case is that there is an agreement in a similar way to the way [Mr Croall] put 29 April, but that it took place on 5 June. That appears to have been abandoned. It does not make a guest appearance in my learned friend’s skeleton. The problem with the pleading was that Mr Oelckers was not at a meeting on 5 June, and when this was pointed out, he said that the pleading must have been by mistake.”

NYK made no comment on Mr Parsons’ statement that the pleaded case appeared to have been abandoned. Following the openings NYK’s two witnesses, Mr Ota and Mr Kawate, were examined. Both had made two witness statements, the first on 27 June 2008 and the second on 29 August 2008. Mr Ota’s first statement refers to the meetings on 4 and 5 June in paragraphs 43 and 44. It is stated that at those meetings for the first time NYK was told that if it wanted to terminate its relationship with CSAV it would have to give 6 months notice. Mr Ota states that he did not agree with that view which was based on the suggestion that the GEX agreement had been dormant or suspended by the SGEX but would spring back to life upon the ending of the SGEX agreement. In Mr Ota’s second statement he records his disagreement with Mr Della Maggiora’s summary of the meetings and in particular states that he remembered Mr Della Maggiora referring only to a six month termination notice under the GEX agreement whereas Mr Della Maggiora said he had not mentioned any specific period. Mr Ota said that he was “clear that CSAV made no mention of the three months termination notice at the meeting – both parties were aware that SGEX had already ended by this time. We had accepted the termination of SGEX (which meant the relationship between NYK, CSAV and KHL under SGEX) after the 4^th cycle.”

Mr Kawate’s first statement dealt with the meetings on 4 and 5 June in paragraphs 89-95. After stating who attended the meeting (on which see 8 above) he stated (paragraph 90) that they were unable to agree on suitable terms for a three party consortium, “so the parties agreed to go their separate ways and we considered whether we would commence a new relationship with CSAV or with HS. We left Santiago advising the parties that we would give our decision after due consideration in Toyko.” He also states (paragraph 91) “it was also decided in Santiago that the SGEX should be formally terminated when the 4^th cycle of the current service ended”. His second statement contains the acknowledgement that Mr Oelckers did not attend the meeting on 5 June and that NYK’s “pleading is incorrect”. He also states that at the meeting “NYK told CSAV that we would decide our position and advise by 20 June which was accepted by CSAV”.

Mr Kaiser’s evidence (first statement, paragraphs 59-60) is that the cross-examination had originally been prepared so as to cross examine Mr Ota and Mr Kawate at length about an oral June agreement. However, following the oral submissions on 22 September, and what he describes as “the obvious non-reliance on any oral June agreement”, it was “substantially reworked and altered so as to remove the cross-examination as to any 5^th June agreement”. Mr Parsons cross-examined the NYK witnesses about NYK’s case that an oral agreement had been made on 29 April.

During cross-examination both Mr Kawate and Mr Ota agreed that there were no discussions between NYK and CSAV on 29 April about the effect of the termination notice of 7 April and there was no agreement on that day to bring their relationship to an end. Mr Parsons did not cross-examine Mr Ota as to whether an oral agreement had been reached on 4 and 5 June but he did ask Mr Kawate about the discussions on 5 June. His questions concerned whether the GEX agreement had been revived, which was relevant to CSAV’s primary case (see [12] above) that the right to terminate remained subject to that agreement. Mr Kawate said that Mr Della Maggiora had not mentioned a specific period of notice but they were told that in CSAV’s view GEX was still alive. Mr Kawate was also asked about Mr Della Maggiora’s evidence that all that was agreed at that meeting was as to KHL’s departure from the service. Mr Kawate’s response was:

“No. No. All three parties discussed about SGEX termination and all three parties agreed to terminate the SGEX at the end of the 4^th cycle. It was agreed unanimously.”

The evidence of the CSAV witnesses was then heard. On the fifth day of the hearing Mr Croall cross-examined Mr Della Maggiora. He asked whether an oral agreement had been reached by all three lines at the meetings on 4 and 5 June that the SGEX service would end after the 4^th cycle. Mr Della Maggiora’s response was that CSAV understood that KHL would leave the service. He said “we never agreed to leave our service between CSAV and NYK on the 4^th cycle”.

At that stage Mr Parsons intervened and expressed his concern about the line of questioning. He referred to the statement in NYK’s opening that there were three candidates for termination and to his own statement in opening that originally in the pleading there was another agreement pleaded, made on 5 June, which seemed to have been abandoned. Mr Croall stated that “it is our pleaded case, I have never abandoned it”. Mr Parsons, in replying to the chairman, said the point was not a forensic one, that NYK had formally abandoned the point and was not entitled to run it, and that he had run the case in the light of what he understood NYK’s case was and so did not ask lots of questions about 5 June. The chairman said the arbitrators had the point and the cross-examination continued.

Both parties’ written and oral closing submissions addressed the question of NYK’s entitlement to allege an agreement on 4/5 June to terminate the SGEX agreement. It was submitted on behalf of CSAV that “an argument based on a 5 June agreement was abandoned and that it is not open to NYK to run”. It was also stated that “the case now being put by NYK (namely that it was Mr Della Maggiora who made such an agreement on 5 June) has never been pleaded and was only raised for the first time on Day 5.” It was submitted on behalf of NYK that the point had been pleaded and at no stage did NYK say that it abandoned the argument although Mr Croall acknowledged “it might have been clearer had it been made clearer”. Two of the arbitrators, Messrs Gaisford and O’Donovan, found that NYK was entitled to take the point and that an agreement had been made on 4/5 June to terminate the SGEX agreement. Their reasons are contained in paragraphs 70-75 of the Award. Paragraph 70 states:

“… although it was NYK’s initial contention that an agreement to terminate was made at the meeting on 4/5 June 2003, they stated that this agreement had been made between Mr Kawate and Mr Oelckers. However, NYK appeared to abandon this contention when it was pointed out to them that Mr Oelckers was not present at the meeting in question. Nevertheless, the contention did re-emerge on the 5^th day of the hearing when Mr Della Maggiora was cross-examined on the point, and CSAV objected to this, arguing that as a result of NYK’s behaviour they had not cross-examined NYK’s witnesses on the point. However, there seems little in that point because the only relevant witness would have been Mr Ota and he did not give evidence on this precise point in his statement. His evidence in relation to that meeting related primarily to the fact that Mr Della Maggiora had referred to the giving of 6 months notice and his understanding that he was referring to notice under the GEX agreement which he considered absurd since it had already come to an end. Furthermore, it is hard to see how CSAV could have been prejudiced by this because that evidence could really have gone only to subjective intent and evidence of that is impermissible. It is also difficult to imagine how any such evidence could alter what was clear on the face of the contemporaneous written evidence i.e. that both parties understood that they had agreed to the termination of SGEX at the end of the 4^th cycle. Nor should it be overlooked that that was precisely what happened. In the circumstances, and given that the point had never been expressly abandoned, we considered that NYK were entitled to maintain their argument in this regard and, indeed, that it would be unjust to prevent them from doing so.”

In paragraphs 71-74 Messrs Gaisford and O’Donovan review the evidence and conclude that at the meetings at Santiago on 4/5 June 2003 NYK, CSAV, and KHL agreed to terminate the SGEX agreement at the end of the then current 4^th cycle. They relied in particular on the contemporaneous documentary evidence, the internal emails and memoranda sent by each party, and the subsequent email from Mr Oelckers to Mr Saieto of NYK copied to inter alia Mr Kawate, Mr Ota and Mr Della Maggiora stating that it had been agreed on 6 June (a mistake for 5 June) between KHL, NYK and CSAV to terminate the SGEX agreement. They also relied on the fact that none of the recipients of Mr Oelckers’s email or anyone else replied to suggest that this was not the case. They stated that: “indeed, the SGEX came to an end at the end of the 4^th cycle in accordance with that agreement”. In paragraph 72 Messrs Gaisford and O’Donovan state that in “these circumstances, it is difficult to see how subsequent witness evidence can really assist” and that Mr Ota and Mr Kawate’s witness statements confirmed what appeared to be the case from the contemporaneous documentation.

Mr Sheppard dissented on this issue. He stated that in the light of what had happened, Mr Parsons had been reasonably led to believe that NYK was no longer advancing a case based on an agreement on 5-6 June and that in the light of this there was prejudice to CSAV in his not cross-examining NYK’s witnesses about that meeting. He referred to the admissions elicited by Mr Parsons from Messrs Ota and Kawate about the alleged agreement made on 29 April during cross-examination and said that “by being misled into not cross-examining NYK’s witnesses on the 5 June meeting Mr Parsons was deprived of the opportunity to seek a similarly relevant and significant admission regarding that meeting”. He considered that that meant there was potential if not actual prejudice to CSAV by NYK’s conduct on the point and that NYK should not be allowed to run it.

Mr Sheppard also considered that even if NYK was allowed to allege an agreement on 5 June, the documents when considered in context, did not support NYK’s case. He set out his reasons for this conclusion fully. The contrary view of the majority has not been challenged on appeal and stands and Mr Croall submitted that it follows that the dissent provides only limited support for CSAV’s application. Strictly speaking this may be the case, although the contextual considerations which led Mr Sheppard to this view were properly relied on by Mr Parsons as indicating the sort of points on which he would have cross-examined had he appreciated the point to be a live one.

Since the tribunal rejected all NYK’s other defences to CSAV’s counterclaim, in the event the counterclaim was defeated only on the basis of the finding that on 4-5 June the parties agreed to terminate the SGEX agreement.

Discussion

Section 68(1) of the 1996 Act provides that the power to set aside or to remit an award arises “on the ground of serious irregularity affecting the tribunal, the proceedings or the award…” In the present case the serious irregularity alleged is in respect of the proceedings and thus the award.

The meaning of serious irregularity is set out in section 68(2). This provides that a serious irregularity is an irregularity of one or more of the kinds set out in the sub-section that “the court considers has caused or will cause substantial injustice to the applicant”. There are thus two limbs to the concept of “serious irregularity”; the presence of one of the specified irregularities, and substantial injustice to the applicant. I shall deal with each limb separately while recognising that in this case, as in many, there is an overlap between the factors relied on under each of the two limbs required for a successful application under section 68.

In the present case the irregularity alleged by CSAV is a failure by the tribunal to comply with the general duty of a tribunal as set out in section 33 of the 1996 Act. Section 33 provides that:

“(1)

The tribunal shall

(a)

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, and

(b)

adopt procedures suitable to the circumstances of the particular case… so as to provide a fair means for the resolution of the matters falling to be determined.

(2)

The tribunal shall comply with that general duty in conducting the arbitral proceedings in its decisions on matter of procedure and evidence and in the exercise of all other powers conferred on it.”

It is clear that an applicant under section 68 faces a high hurdle: see paragraph 280 of the report of the Departmental Advisory Committee (“DAC”) which observed that what became section 68 “is really designed as a long stop only available in extreme cases where the tribunal has gone so wrong in its conduct of the arbitration that justice calls out for it to be corrected”. This passage has been cited with approval and relied on in, inter alia, Hussman (Europe) Ltd v Al Ameen Development and Trade Co. [2000] 2 Lloyds Rep 83 at 95 (Thomas J); Lesotho Highlands Development Authority v Impreglio SpA [2005] 2 Lloyds Rep 3110, 318 (Lord Steyn); and The “Magdalena Oldendorff” [2008] 1 Lloyds Rep 7 46 (Lawrence Collins LJ).

Mr Parsons submitted that there was an irregularity in the present case because CSAV was not given a reasonable opportunity of dealing with NYK’s case that on 4/5 June CSAV and NYK agreed to terminate the SGEX agreement. This was because NYK was allowed to rely on the point although, as two of the Arbitrators acknowledged in paragraph 70 of the Award (see [32] above) it appeared that NYK had abandoned the contention, and only raised it after CSAV, relying on the abandonment of the point, had concluded its cross-examination of NYK’s witnesses without cross-examining them on this point.

As to whether a reasonable observer would have concluded that NYK was not relying on an agreement made on 4/5 June, Mr Parsons relied on a number of matters. The first is the absence of any reference to this point as one of the arguments in the written opening submissions. The second is the absence of any reference to the pleading in NYK’s oral opening submissions. Thirdly, he relied on the contrast between Mr Croall’s treatment of the events on 29 April and those on 4/5 June in his opening submissions. Mr Croall had shown the arbitrators the document which it was said supported a finding of an oral agreement on 29 April but did not mention an oral agreement on 5 June as a candidate, or show them either the documents on which NYK later relied as evidencing an oral agreement on that day or the pleading which referred to an agreement on 4 and 5 June.

Mr Parsons also relied on the failure by NYK to respond to the statement in CSAV’s written opening submissions and what he said in his oral opening submissions and the absence of any explanation for this. He submitted that in the light of what happened a reasonable person in CSAV’s position would reasonably conclude that NYK was no longer pursuing a case based on an agreement made on 4/5 June as a candidate for the termination of the SGEX agreement.

NYK’s position was that there was no irregularity on the facts of this case because there was no express or implied abandonment by NYK of its pleaded case that the SGEX agreement was terminated by an agreement made on 4/5 June. Mr Hodgson’s evidence is that NYK did not intend to abandon the point and had given no instructions to its legal team to do so.

As to express abandonment, although the pleading had identified the wrong person from CSAV as present and this was acknowledged, the plea of an agreement on those dates was never withdrawn. At no point did NYK’s counsel or solicitors state that the point had been abandoned or would not be advanced or relied on. The point was referred to in the factual background section of NYK’s written opening submissions and in the chronology NYK served with those submissions. At no stage did CSAV by its solicitors or counsel seek confirmation from NYK’s lawyers that the case based on an agreement made on 4/5 June was no longer being pursued and CSAV did not seek a ruling from the tribunal on this point before examining NYK’s witnesses. Moreover, the tribunal did not raise the matter with NYK’s legal team.

Mr Croall also relied on the fact that, when he cross-examined Mr Della Maggiora on the point and Mr Parsons raised the matter, the tribunal chairman’s response was that the point had not been abandoned because it was a pleaded point. Mr Croall also relied on the acceptance in CSAV’s opening that there had been an agreement reached on 5 June that the SGEX service was to end. This point, however, seems more relevant to the question of whether the matters which CSAV submit constituted an abandonment caused any material difference to the course of the arbitration and any substantial injustice.

As to implied abandonment of the point, Mr Croall, relied on Thomas v Marconi’s Wireless Telegraph [1965] 1 WLR 850 at 852, 853 and The “Linardos” [1994] 1 Lloyds Rep 28 at 37 as showing that the absence of any reference to the point in NYK’s written opening submissions was not a sufficient foundation for an implied abandonment. Paragraph 45(ii) of his skeleton argument states that “given that neither CSAV’s lawyers nor the tribunal ever asked NYK’s lawyers prior to the examination of NYK’s witnesses whether the point was being relied upon, the silence on the part of NYK’s lawyers cannot be construed as a representation of any kind, still less one of a character sufficient to found an abandonment”. Finally, he submitted that since CSAV’s counsel indicated that he was not going to take pleading points, there was no reason to think that silence by NYK even after the comments made in opening by Mr Parsons, could possibly mislead CSAV or cause it to change its approach to the hearing.

Mr Croall argued that The Linardos is particularly telling because it involved an arbitration about a dispute about a demurrage claim which was conducted on documents and without an oral hearing. The charterers’ written submissions to the arbitrator did not refer to all the subsidiary points they had pleaded and did not put them forward as an alternative defence in case they were wrong on their central point. Success on the subsidiary points would have substantially reduced the owners’ claim. Either because he overlooked the pleadings or because he assumed from the written submissions that the subsidiary points had been abandoned, the arbitrator did not deal with them. Colman J considered the charterers were seriously at fault in not raising the pleaded subsidiary points in their written submissions, and was sympathetic to the arbitrator. But he held that an abandonment was not made out and that, in the absence of abandonment, it was the duty of the arbitrator to address the substance of the points in the pleaded case.

Mr Croal submitted that in the absence of an abandonment, CSAV cannot rely upon having been inadvertently misled. He relied on the statement of Moore-Bick J (as he then was) in the “Marie H” [2001] 1 Lloyds Rep 707 at 710 that where a party to arbitral proceedings bases his claim under section 68 on the manner in which the other party has conducted himself in relation to the proceedings it is doubtful whether “anything short of unconscionable conduct would justify the court in setting aside the Award”. He submitted that in the circumstances of this case NYK’s conduct could not be described as “unconscionable”. NYK had not been asked for confirmation that the argument was no longer being pursued and neither the omission of this part of the pleaded case from the written and oral opening submissions nor NYK’s failure to respond to what CSAV said in its written and oral opening submissions about its assumption amounted to unconscionable conduct.

I have concluded that in the particular circumstances of this case NYK did impliedly abandon the pleaded point. In the light of Colman J’s decision in The“Linardos” it is not possible to say that the absence of reliance on the pleaded point in NYK’s written opening submissions and indeed in Mr Croall’s oral opening submissions in themselves constituted an implied abandonment. Neither did the failure to respond to the statement in a footnote in CSAV’s written opening submissions that, in the light of NYK’s acceptance in Mr Kawate’s second statement that it’s pleading on this matter “is incorrect”, “it is therefore assumed that this allegation is no longer pursued”. The fact that the failure to rely on the point in those NYK documents occurred after what Mr Kawate said in his second statement adds something to Mr Parsons’s submission. It does so because the arbitrators, in what must be a reference to Mr Kawate’s statement, said that NYK appeared to abandon this contention when told that Mr Oelckers was not present at the meetings on 4/5 June. But I would not have regarded that as in itself sufficient a distinction from the scenario dealt with by Colman J in The“Linardos”.

All those matters, however, constitute the background to what occurred during the opening submissions. Against the entirety of that background, the way Mr Parsons put the matter in his oral opening submissions, gave some emphasis to the issue and a clear indication of CSAV’s understanding of the case it had to meet. During his oral opening submissions Mr Parsons stated that, if each of the three candidates for termination in paragraph 127 of NYK’s opening submissions failed “it seems to be common ground and that there would be a repudiatory breach because there was no valid notice of termination”. He also showed the tribunal the pleaded case of an agreement on 4/5 June, said that the pleaded case “appears to have been abandoned”, and that what was now being advanced by NYK was a “new case”. There was no interruption or response by the NYK team when Mr Parsons made these statements or before he cross-examined NYK’s witnesses. The majority arbitrators do not refer to this or to NYK’s failure to correct him. It appears from what they said (see the extract from paragraph 70 of the Award: [32] above) that they considered that the appearance that NYK had abandoned the point stemmed from Mr Kawate’s statement that “our pleading is incorrect”. They do not refer to the written and oral opening submissions.

In his oral submissions Mr Parsons did all that he could to clarify whether NYK was advancing this point except to put it directly to Mr Croall and NYK’s team and to ask them for a response. What he said followed and in a sense thus responded to written and oral openings by Mr Croall which did not refer to the point or to the pleading. Moreover, Mr Parsons explained why CSAV understood that NYK had abandoned the pleaded case, in part by expressly referring to the pleading and showing it to the tribunal, and contrasting it with the argument based on an agreement on 29 April. In my judgment what occurred during the oral opening submissions distinguishes the position in this case from that in The“Linardos” which, it is to be remembered, was an arbitration on documents alone. To require a party in the course of an oral proceeding formally to put the matter to its opponent and to require an answer would be to inject a degree of formality that might be thought to be inappropriate in a commercial arbitration. Since the assumption on which CSAV was proceeding was thus clearly stated at the outset of the hearing and before any witnesses were called I consider that a reasonable person present would have concluded that the silence by NYK’s lawyers after the comments made by CSAV at the hearing in their presence and in the presence of the tribunal meant that NYK was not pursuing the argument based on an agreement on 4/5 June.

NYK only showed that it wished to rely on the point some days later after the cross-examination of NYK’s witnesses by Mr Parsons had been completed and when Mr Della Maggiora was being cross-examined by Mr Croall. CSAV did not thereafter ask that the NYK witnesses be recalled but it was not suggested by NYK either at the time or in their skeleton argument for this hearing that CSAV should have done so. I asked Mr Parsons whether consideration had been given to this. He said he did not ask for the witnesses to be recalled. His reasons were: (a) that it would be impossible to conduct a fair cross-examination without a proper build up, and (b) it was not practical to recall Mr Ota and Mr Kawate because to do so would have required an adjournment and a new hearing date to be set. After Mr Parsons raised the point, the tribunal said that the matter need not be debated in the middle of cross-examination. At the end of Mr Della Maggiora’s cross-examination Mr Parsons said the point could be left to closing submissions. I have considered whether the fact that Mr Parsons might have applied to recall the witnesses and to have remedied the position means that there was not an irregularity. I have concluded that, in the light of what Mr Parsons said about the impracticability of recalling the witnesses, the answer is “no”. In all these circumstances I consider that CSAV was not given a reasonable opportunity of dealing with the evidential foundation of NYK’s case by full cross-examination of NYK’s witnesses on the point. This was because, at the stage when CSAV cross-examined those witnesses, it was entitled to conclude as a result of what had occurred during the opening submissions that NYK was not pursuing the argument based on an agreement on 5 June. For these reasons, in my judgment there was an irregularity affecting the proceedings.

The next question is whether the “irregularity” was a “serious irregularity” within section 68(2). The second limb of the concept of “serious irregularity” is that it “has caused or will cause substantial injustice to the applicant”. So the question is whether the irregularity (here the absence of an opportunity to cross-examine NYK’s witnesses on the point) causes such an injustice in all the circumstances. This is broadly similar to the common law concept of procedural fairness in public law contexts. Although the difference of context must be borne in mind, I observe that, for example, De Smith’s Judicial Review (6^th edition, 7-083) states of cross-examination:

“The true question in every case is whether the absence of cross-examination renders the decision unfair in all the circumstances. If no useful purpose is likely to be served by allowing cross-examination then the courts will be slow to disturb [the] decision.”

It is submitted on behalf of CSAV that it was prejudiced in that it did not cross-examine NYK’s witnesses about NYK’s case that an oral agreement had been made on 5 June because it was led to believe that NYK was no longer advancing that case. If NYK was advancing the case, cross-examination as to what was said at the meeting on 5 June was important in determining whether an agreement had been reached and what its terms were.

Mr Parsons argued that a breach of the general duty of a tribunal under section 33(1)(a) to act fairly and impartially between the parties almost always causes substantial injustice. He relied on the statement of Lawrence Collins LJ in The “Magdalena Oldendorff” [2008] 1 Lloyd’s Rep 7 at [47] that “the question is whether the tribunal has given the parties a fair opportunity of addressing them on all issues material to their intended decision, or whether there has been a denial of a fair hearing”. He also relied on the decision in Pacol Ltd v Joint Stock Co. Rossakhar [2000] 1 Lloyd’s Rep 109. That case involved a documents only arbitration. The respondents admitted liability and made submissions on quantum. The arbitrators sent a letter to the parties containing a number of questions. They did not indicate they were contemplating reopening the question of liability but, in the light of the answers to the questions, dismissed Pacol’s claim in its entirety. Colman J granted Pacol’s application under section 68 and set aside the award. He stated (at 115):

“…[W]hat has happened in this case is that an award has been made on a basis which the claimants never had a reasonable opportunity of making the subject of their submissions or the subject of evidence. They were never given the opportunity of addressing the tribunal on the effect of the agreement of Feb 18 on liability…

In those circumstances, I have no hesitation in concluding that there has in the present case been a serious irregularity within the meaning of section 68(1) of the 1996 Arbitration Act.”

Mr Parsons also relied on the statement of Morison J in ASM Shipping of India v TTMI Ltd of England [2006] 1 Lloyd’s Rep 375 at [39(3)] that where the properly informed reasonable observer concluded that there was a real possibility of bias, that was a species of serious irregularity which has caused substantial prejudice. His Lordship rejected the suggestion that, if it was concluded that there was a real possibility of bias, the court must then inquire as to whether substantial injustice has been caused. Morison J’s statements were made about an apparently biased tribunal. He also stated “the right to a fair hearing by an impartial tribunal is fundamental”, and “it is contrary to fundamental principles to hold that an arbitral award made by a tribunal which was not impartial is to be enforced unless it can be shown that the bias has caused prejudice”.

It does not, however, follow that what was said by Morison J about an apparently biased tribunal applies to all breaches of the general duty of a tribunal in section 33 of the 1996 Act. It is well established that in considering an application under section 68 the court is not required to decide for itself what would have happened in the arbitration had there been no irregularity. To do so would be an inappropriate inroad into the autonomy of the arbitral process. What, however, the court is required to consider, is whether “the point is one where the tribunal might well have reached a different view”: see Vee Networks Ltd v Econet Wireless International Ltd [2005] 1 Lloyd’s Rep 192 at [88] and [90] per Colman J and Van der Giessen-de-Noord Offshore BV [2009] 1 Lloyd’s Rep 273 at [13] per Christopher Clarke J.

This follows from the structure of section 68 and the fact that there are two limbs to its concept of “serious irregularity”. If what Morison J said about apparent bias applied to all breaches of the general duty in section 33, the second limb of the concept would be redundant in such cases. Van der Giessen-de-Noord Shipbuilding Division BV v Intech Marine and Offshore BV did not concern the irregularity specified in section 68(2)(a), a breach of the general duty in section 33. It concerned the irregularity specified in section 68(2)(d), the failure of a tribunal to deal with all the issues that were put to it. Vee Networks Ltd v Econet Wireless International Ltd, however,did concern breach of the general duty in section 33. In that case the tribunal decided the case on a point that had never been argued before the arbitrator.

The more recent decision in The “Magdalena Oldendorff” [2006] EWHC 2532 (Comm) affirmed [2008] 1 Lloyds Rep 7 also concerned an alleged breach of section 33. The alleged breach was a failure by the arbitrators to ask counsel for the ship owners whether he had anything to say on a point he had not dealt with. Christopher Clarke J, in a decision affirmed by the Court of Appeal, held there was no breach of section 33. He indicated that, had he found there was a breach, the question he would have asked was whether, but for the breach, the tribunal might have reached a different decision. As to that, he said he could not say that there was plainly no prospect of the submissions on behalf of the owners being right; [2006] EWHC (Comm.) 2532 at [77] and see [2008] 1 Lloyd’s Rep 7 at [24] (Court of Appeal).

So the question is whether, but for the irregularity which caused the arbitrators to reach (by a majority) a conclusion unfavourable to CSAV, they might not have reached that conclusion. To put it another way, might what CSAV was deprived of have made a difference.

The starting point of Mr Parsons’ submissions was that in an adversarial process cross-examination is fundamental. In this case, as what was at issue was whether an oral agreement had been reached he submitted the evidence of those at the meeting as to what was said and agreed was crucial. Mr Ota was not asked any questions about the events at the meetings on 4 and 5 June. Mr Ota was, as the senior person, as Mr Kawate accepted, the person who would, have taken the lead in discussions. The questions put to Mr Kawate about 5 June were of an en passant nature and not a cross-examination on this point. They concerned CSAV’s primary case, that the GEX agreement had been revived. He submitted that cross-examination of Mr Ota was more important because in his witness statement he did not give evidence on the precise point about a June agreement. Mr Parsons criticised the arbitrator’s statement that it was “difficult to imagine how [cross-examination on the issue] could alter what was clear on the face of the contemporaneous written evidence”. He did so because the documents relied on were emails on which (as NYK had submitted in relation to an email on another point) it was dangerous to rely too much because an email is not a settled document. He also pointed out that NYK said that the documentary evidence relied on in support of an agreement on 29 April was “clear” (Closing Submissions, paragraph 99) but as a result of the cross-examination of Messrs Ota and Kawate the tribunal accepted that an agreement to bring the relationship to an end was not made at the meetings on that day.

Mr Parsons said that he would have asked the NYK witnesses a number of questions about 5 June. These included exploring the matters referred to by Mr Sheppard in his dissent. They also included why, if Messrs Ota and Kawate believed they had terminated the SGEX agreement with a valid notice on 7 April, they entered into a further agreement and why, if there was no agreement before then, CSAV would have agreed to terminate the SGEX agreement with such short notice. He argued that it was not possible to say that there was no prospect of getting a concession from Messrs Ota and Kawate in relation to 5June similar to that obtained in relation to 29 April.

Mr Parsons also submitted that it was not possible to say that, because it was common ground that it was agreed on 5 June that KHL would leave the service and the tripartite relationship would end, it necessarily followed that it had been agreed that on that date that the SGEX agreement would end. The arbitrators accepted in paragraph 73 of the majority Award that there was a difference between “termination of SGEX, which would only be terminated as a matter of law by termination of the agreement rather than by expelling one party to that agreement, and termination of the relationship between CSAV and NYK”. The fact that it was common ground that it had been agreed that one party was leaving the service did not mean that there was an agreement that the SGEX agreement was to end. What the parties had agreed on depended on their intentions objectively ascertained and that depended on what they said to each other. Accordingly, cross-examination was important.

I accept Mr Parsons’ submission that the statement in paragraph 70 of the Award (see [32] above) “there seems little in [the] point because the only relevant witness would have been Mr Ota and he did not give evidence on this precise point in his statement” is of little weight. As Mr Parsons said, it was because Mr Ota had not covered the matter that it was more important to cross-examine him. In the case of the agreement alleged to have been made on 29 April, the cross-examination of the NYK witnesses had proved effective. I also agree that evidence by Mr Ota might have gone to what was in fact said at the meetings.

I have, however, concluded that, in the circumstances of this case, the irregularity did not lead to substantial injustice to CSAV. It is of course true that in an adversarial system cross-examination is important. Mr Parsons relied on the Court of Appeal Criminal Division’s decision in Sharp [1994] QB 261. The court stated (at 273) that “in the case of any complexity cross-examination of the principal witness is something that calls for careful preparation and planning” and that it “is the most important part of the advocate’s art”. In many cases it may indeed be that the absence of an opportunity to cross-examine on a particular point must be seen as leading to a substantial injustice. However, while recognising that the observations in Sharp’s case are applicable in commercial cases, it has to be observed that the factual context in which they were made was very different from the facts in the present case. In Sharp it was held that the frequency of the judge’s interruptions during cross-examination (and indeed during defence counsel’s closing speech) so disrupted the thread of cross-examination and the conduct of the trial as to amount to a material irregularity. This was in part because the interventions weakened the impact on the tribunal of fact, the jury, of defence counsel’s attack on the credibility of a prosecution witness.

In the present case, however, CSAV’s case about 5 June was fully before the tribunal of fact. The arbitrators considered the parties’ submissions as to the effect of the absence of an opportunity by CSAV to cross-examine NYK’s witnesses about an agreement on 5 June. So this case is in that respect unlike Sharp’s case where the court was concerned that the jury had been distracted. It is also unlike cases, for example, The ‘Lindaros’, The ‘Magdalena Oldendorff’, and Pacol Ltd v Joint Stock Co Rossakhar, in which the point relied on in the application under section 68 of the 1996 Act was not ventilated before the arbitral tribunal prior to its decision. In this case, an experienced arbitral tribunal considered whether NYK was entitled to rely on an agreement made on 5 June and, by a majority, concluded that it was entitled to rely on the point.

My conclusion is largely based on the implications of CSAV’s acceptance (see, for example, the last sentence of the footnote in its written opening submissions set out at [22] above) that the parties had agreed that the joint service would come to an end on 6 July. The arbitrators had accepted (Award, paragraph 45, on which see [11] above) that if the SGEX agreement ended that did not mean the service came to an end. But the two arbitrators in the majority considered that the converse was not true. In paragraph 73 of the Award they state that the fact that the parties had agreed on that day that the joint service would come to an end necessarily meant they then agreed that the SGEX agreement would end. The purpose of the SGEX agreement was to regulate the joint service. Accordingly, when the joint service ended so did the SGEX agreement. In these circumstances the arbitrators were entitled to conclude that evidence could not alter what necessarily followed from CSAV’s acceptance that the joint service would come to an end on 6 July.

Mr Croall also relied on a number of other factors, such as that Mr Ota had said in his evidence that he could not remember what Mr Della Maggiora had said at the meeting on 4 and 5 June and Mr Kawate’s response in cross-examination that it was agreed unanimously that the SGEX would terminate at the end of the 4^th cycle. While these are matters on which it might properly be submitted that cross-examination would not be probative, they are in themselves not conclusive because, as Mr Parsons argued, the eventual outcome (as in the case of the arguments based on the agreement on 29 April) would depend on the responses to cross-examination.

The fact that CSAV accepted that it had been agreed on 5 June the SGEX service would come to an end on 6 July is in a different category. The majority of the tribunal concluded that it was not possible to expel a party from the agreement and to end the service but to keep the agreement alive. Accordingly, they held the expulsion and the agreement to end the service would have the effect of terminating the agreement. The changes in the service in previous years which did not lead to the winding up of the joint service had not done so because the parties had come to “a further agreement by which the service would be continued”. It was that which the parties had never failed to do in the preceding years but did fail to do in 2003. I have concluded that the arbitrators were entitled to conclude on facts which are undisputed that the parties agreed to end the SGEX service on 5 June, and that the finding of the tribunal that the SGEX agreement also ended then was inevitable. In these circumstances I consider that their conclusion that cross-examination on the point would make no difference was one which they were entitled to reach. Accordingly, this application is dismissed.