Micoperi SrL v The Shipowners' Mutual Protection & Indemnity Association (Luxembourg)

This has been the hearing of an appeal under s69 of the Arbitration Act 1996 and an application under s68 of the Act, arising out of an Arbitration Award made by Messrs Jonathan Hirst QC, Michael Baker-Harber and, as Chairman, Mark Hamsher, on 21 December 2010. I gave permission to appeal in respect of two interlinked points of law.

The Award was a Partial Final Award, relating to four preliminary issues which the parties agreed should be tried by the Arbitrators, the first of which, for the purposes of this hearing, has been in effect the only relevant one. The Claimant in the Arbitration (Defendant before me) was the Shipowners Mutual Protection Indemnity Association (Luxembourg) (“the Club”), for whom Mr Robert Bright QC appeared, both before the Arbitrators and before me. Micoperi SRL (“Micoperi”), the Respondent in the Arbitration and Claimant before me, for whom Sara Masters appeared both before the Arbitrators and before me, was a member of the Club for the 2005/6 year.

After an incident on 3 October 2005 in the Black Sea, which led to claims against Micoperi by (inter alios) a third party, Toreador Turkey Ltd (“Toreador”), the Claimant’s vessel Micoperi 30 was arrested by Toreador in Palermo on 3 July 2006. Micoperi’s application to a judge in Palermo to have the vessel released was successful on 10 July 2006, although, according to paragraph 18 of the Award, “the decision was based entirely on technical and local evidential reasoning: it provided no assurance that the vessel could not be properly and effectively arrested in the future”. Micoperi both denied any liability to Toreador, whose claim was said to be for up to €11.6m, and asserted its own claim against Toreador for some €4.5m. Micoperi was contemplating (as appeared from a solicitor’s note of meeting of 11 July 2006), an arrest of pipes the property of Toreador, which had been sent to a yard in Italy for cement coating and were essential for Toreador’s operations.

In the event, on 14 July 2006, two things occurred:

However, in August 2006, the Club concluded that Micoperi was not covered, because the Chief Executive Officer of the Club’s managers concluded that the casualty was the result of specialist operations and excluded under the Club cover. After discussions, the Club agreed to continue the cover, under reservation of rights, and continued to provide the services of the Club’s solicitors, for the purposes of defending Toreador’s claim.

With a view to resolving the disputed proceedings between Micoperi and Toreador, a mediation took place on 28 and 29 October 2008. Costs at that time on both sides were estimated at a total of US$8m up until the end of the trial. Micoperi offered to settle on a ‘drop hands’ basis, but this was rejected, and Toreador wanted US$14m. In the event, on 5 November 2008, a settlement was agreed by which Micoperi was to pay to Toreador US$5.8m, which, pursuant to the Letter of Undertaking (“LOU”) which the Club had provided pursuant to its agreement to give security to Toreador, the Club paid to Toreador. In this Arbitration, the Club seeks to recover from Micoperi the amount that it paid to Toreador, together with legal costs incurred, for which the Club paid.

Several issues arise in the Arbitration, including of course the fundamental question as to whether the Club was entitled to deny cover by reference to its assertion of the specialist operations exclusion, but the central preliminary issue, to which I refer in paragraph 2 above, and which has now featured before me, relates to whether the Club is entitled to deny cover in the light of its unequivocal representation made on 14 July 2006, referred to in paragraph 4(i) above.

The preliminary issue, as set out by the Arbitrators at paragraph 65, is:

“Has the Club waived its right to contend and/or is the Club estopped from (a) denying that the underlying claim, settled by the Club with [Toreador], was covered by the terms of the vessel’s entry and (b) claiming repayment or indemnity or restitution or damages in the sum of US$7,106,386 in respect of its payment under the LOU?”

The issue consequently was one of whether there was or was not estoppel, and, at paragraph 37 of the Award, the Arbitrators set out the common ground:

“37.

Counsel agreed that there were two main questions for us to decide:

(1)

Whether the Club did make an unequivocal representation that it did not intend to enforce its legal rights;

(2)

Did Micoperi act in reliance on that representation with the effect that it would be inequitable for the Club to enforce its rights.”

There is no doubt that these are the correct legal questions.

The first question was answered, as I have said, in paragraph 44 of the Award, namely that “the first limb of the requirements for equitable estoppel is established: the Club did unequivocally represent that it accepted cover and would not enforce its legal rights to decline it.” The Arbitrators then turned to the second limb, and they recited, at paragraph 45 of the Award, the issues of reliance upon which Micoperi founded their case. Six matters are set out. Only the first two had been pleaded, but Miss Masters ran the other four (both in evidence and submissions) in addition, and without objection: none of those four matters is relevant to the s69 appeal, but I set out the sixth, as it is relevant to the s68 application. Paragraph 45 reads as follows, under the Heading “Did Micoperi act in reliance on that representation with the effect that it would be inequitable for the Club to enforce its rights?”:

“45.

We turn to the second limb. In their pleadings, Micoperi relied on two matters:

(1)

Micoperi would have taken its own steps to settle Toreador’s claim and Micoperi’s counterclaim much sooner.

(2)

Micoperi would have sought to obtain security from Toreador by arresting pipes which were essential for the operations in the Black Sea. This would have put commercial pressure on Toreador to settle.

In argument Miss Masters raised four additional points:

…

(6)

Micoperi became bound to accept a settlement substantially in excess of what it considered to be a reasonable settlement of the claim and which took no account of its counterclaim rights which were compromised by the club in instructing HFW to settle the proceedings.

Mr Bright rightly did not take any objection to these additional points being taken, and we will consider them on their merits.”

The first two matters are wholly intertwined, were so treated below and have been so treated before me. They are dealt with in paragraphs 46 to 49 of the Award as follows:

“46.

Points (1) and (2) are closely linked and we will take them together. In mid-July 2006, Mr Bartolotti learned that Toreador had some pipes which had been sent to the Socotherm yard in Italy for cement coating, before being transported to be laid in the Black Sea. The pipes were believed to have considerable financial value. Mr Bartolotti believed that Toreador needed the pipes urgently in the Black Sea and that if Micoperi arrested them in order to secure its claim for payment of outstanding invoices, this would have placed great pressure on Toreador to settle the entire dispute cheaply.

47.

Mr Bartolotti raised the point with Mr Dean at the meeting in Ravenna on 11 July 2006. Mr Dean’s note included the following:

“Strategy

3.

Consider tactic of arresting pipes to secure claim – dependent on Palermo outcome.”

In the event, the possible arrest was overtaken by HTD’s offer made on 14 July, in return for an LOU, for security for Micoperi’s counterclaims to be provided, as was ultimately provided in the form of a bank guarantee.

48.

In our view, Mr Bartolotti’s strategy depended for its success on Toreador being unwilling or unable to provide security for Micoperi’s claims. The reality however, as was demonstrated within 3 days of Mr Bartolotti first raising the idea and on the very day that the Club confirmed cover, was that Toreador was willing and able to provide security. In those circumstances, we do not see how Micoperi could properly have sought to arrest and/or maintain an arrest of the pipes. Even if it had done so, it is clear that security would have been offered and that the arrest would have had to be lifted.

49.

In our judgment, therefore, there was no means of putting commercial pressure on Toreador to settle at an early stage. The Club’s confirmation of cover did not deny Micoperi the opportunity to settle earlier or to obtain security. More generally, we consider that Mr Bartolotti underestimated the seriousness of Toreador’s claim and its determination (with the other Claimants) to press it.”

The Arbitrators then addressed the other four matters (I shall return to item (6), which is dealt with in paragraphs 53 to 56 inclusive, when I address the s68 application). The Arbitrators determined as follows:

“57.

In conclusion, therefore and looking at the overall position, although we have considerable sympathy for its position, we find that Micoperi did not act in reliance on the representation that the claim was covered by the Club. The reality is that as a result of the Club’s mistaken confirmation of cover, Micoperi obtained the benefit of the Club’s LOU – something it would not have obtained if the Club had declined to confirm cover from the outset. As we see it, the LOU constituted a substantial advantage for Micoperi. Had no LOU been provided, the vessel and quite possibly other assets belonging to Micoperi would have been arrested. This would have been a commercial disaster for Micoperi, as it did not have the means to provide alternative security. The absence of reliance meant that, despite the representation, it would not be inequitable for the Club to enforce its rights.”

It is thus clear that the second limb was answered by the Arbitrators simply on the basis that there was no reliance by Micoperi on the Club’s representation in any of the respects alleged. Miss Masters’ submission is that this is an extraordinary conclusion. She submits that, on the Arbitrators’ own findings of fact, in particular paragraph 47, as set out above, there must have been and was reliance by Micoperi. Toreador was prepared to provide security, and, in the event, did so, but only upon the basis that Micoperi would also supply security, and Micoperi was only in a position to provide such security because it had by then had the representation of cover, and thus the Club’s LOU was supplied to Toreador, and Toreador gave its counterbalancing security. As the Arbitrators said, in paragraph 47: “In the event, the possible arrest [of the pipes] was overtaken by [Toreador’s solicitor’s] offer made on 14 July, in return for an LOU, for security for Micoperi’s counterclaims to be provided as was ultimately provided in the form of a bank guarantee”.

Miss Masters recognises that, in order for there to be a successful appeal against an Arbitration Award, there must be an error of law, and not an error of fact, however egregious. Her submission is that, particularly given the experience of the Arbitrators, they cannot simply have made such a serious error of fact. In the very next paragraph to paragraph 47, paragraph 48, they recite that “the reality … was that Toreador was willing and able to provide security” such that Micoperi could not properly then have sought to arrest or maintain an arrest of the pipes, and an error of fact would mean that they had forgotten the fact, only just recited in the preceding paragraph, that Toreador’s security was only offered in return for the LOU, which the Claimant was able to offer because the Club, having confirmed the cover, was now in a position to supply it.

Such a surprising error of fact, submits Miss Masters, must indicate that there was an error of law by the Arbitrators, and she suggests one of two:

Miss Masters relies upon the dicta of Mustill J in The Chrysalis [1983] 1 Lloyd’s Rep 503 at 507, where, in the seminal passage in which he explains how the arbitrator’s process of reasoning must be trisected into three stages, only the second of which, the ascertainment of law, can be the subject of an appeal, he says as follows:

“In some cases an error of law can be demonstrated by studying the way in which the Arbitrator has stated the law in his reasons. It is, however, also possible to infer an error of law in those cases where a correct application of the law to the facts found would lead inevitably to one answer, whereas the Arbitrator has arrived at another: and this can be so even if the Arbitrator has stated the law in his reasons in a manner which appears to be correct – for the Court is then driven to assume that he did not properly understand the principles which he had stated.”

It is against this background that I gave permission, stating in my decision that “the conclusion by the Tribunal in relation to the question set out in paragraph 37(2) and 45(2) of its Award at paragraphs 47 and 48 and 57 may constitute a serious error of fact, not capable of appeal. However, it appears to me sufficiently arguable that the Tribunal may have reached their conclusion” by reason of an application of one or other of the two errors of law which Miss Masters has alleged.

The matter has now been fully argued, and, as is so often the case in an arbitration appeal dependent upon a short analysis of the arbitrators’ reasons and without nitpicking examination of them, the answer is clear.

First, even if the Arbitrators fell into error in their conclusion that there was no reliance by Micoperi in any of the respects alleged by Miss Masters in paragraph 45 of the Award, I am entirely satisfied that such error, if error it was, does not result from either of the two errors of law asserted by her:

It is enough to dispose of this appeal if I were to conclude consequently that, even if there were an error of fact, no error of law as asserted by Miss Masters can be espied. However, as one would expect in the case of such Arbitrators, there is an answer even to Miss Masters’ assertions, by reference to the facts. Mr Bright pointed to the precise terms in which Micoperi asserted their reliance, as set out in paragraph 45(1) and (2) (in paragraph 10 above). As is apparent from paragraph 47 of the Award, Mr Bartolotti of Micoperi had a strategy for arresting Toreador’s pipes in order to put commercial pressure on them. Mr Bright has shown me paragraphs 44 to 46 of his closing submissions, which plainly formed the basis for the Arbitrators’ conclusions, thus accepting the Club’s case. Mr Bright’s submissions, as their set out, were by reference to the evidence given by Mr Bartolotti in the Arbitration, and read as follows:

“44.

In fact, Mr Bartolotti made it clear in his oral evidence that he had not been thinking of settling as such in July 2006. Rather his thoughts were of the possibility of arresting Toreador’s pipes in Italy and drawing out the proceedings in Italy related to that for a very long time, so as to put commercial pressure on Toreador to settle … In other words this all hinged on the possibility of arresting Toreador’s pipes and keeping them subject to arrest for a lengthy period.

45.

The potential legal basis for arresting Toreador’s pipes were as security for Micoperi’s counterclaim for unpaid invoices, i.e. on the basis that Micoperi was entitled to security from Toreador for that counterclaim. The strategy therefore hinged completely on Toreador not being able to provide, or at least refusing or failing to provide, security … The single factor determining whether it would or would not be possible to arrest Toreador’s pipes was whether or not Toreador would offer to provide security – in which case it would not be possible to make the arrest.

46.

Toreador did offer security, on 14 July 2006 … The idea of [seeking to arrest the pipes] was abandoned not because of the Club LOU, but because of Toreador’s offer of security, as Mr Bartolotti confirmed.”

In those circumstances it was plainly, in my judgment, open to the Arbitrators to accept the submission which Mr Bright did make to them on behalf of the Club, namely that the alleged act of reliance set out in paragraph 45(1), namely settling Toreador’s claim early, did not arise and that, as for that in 45(2), the arresting of Toreador’s pipes so as to put commercial pressure on Toreador was in fact scuppered or “overtaken” by Toreador’s offer of security, such that the act of reliance suggested by Micoperi fell away on the facts.

There were no errors of law by the Arbitrators and there is no basis for this appeal.

I turn to the application under s68. The Claimant asserts that there was an irregularity causing substantial injustice in relation to the Arbitration, falling within ss68(2)(a) and/or (b) of the Act, effectively summarised by the submission that the Tribunal reached a conclusion which did not fall within its reference, and which may have a substantial prejudicial effect on the balance of the arguments in the Arbitration after the resolution of the preliminary issues by the Arbitrators, and after this appeal. Miss Masters relies, by way of illustration on the decisions of Cooke J in BTC Bulk Transport Corporation v Glencore International AG [2006] EWHC 1957 (Comm) and of Gloster J in OAO Northern Shipping Company v Remol Codores De Marin SL [2007] EWHC 1821 (Comm), where (per Cooke J at para 16) “what did take place was so far removed from what could be expected of the arbitral process that the Court should interfere … it is a substantial injustice for the hearing to take place on an altogether different basis”.

Miss Masters submits that the issue of the reasonableness of the settlement entered into in November 2008, referred to in paragraph 6 above, was not in issue at this hearing, and yet the Arbitrators made a conclusion about it in paragraph 56 of the Award:

“… we reject the proposition that the settlement was too high. It is clear that it was the best settlement that could be achieved in the circumstances. It was below the ‘all in’ figure recommended by leading counsel. The Claimants would not have been prepared to settle for less. The counterclaim was not ignored. The only alternative was to take the case to trial. Counsel’s advice was pessimistic as to Micoperi’s prospects. We consider that the probability was that, if the case was fought, Micoperi would have lost and found itself facing a very large liability in damages, plus a significant costs bill.”

There is no doubt, and the exchange of correspondence prior to the Arbitration, to which I have been directed, bears out, that the reasonableness of the settlement, and thus the entitlement to be indemnified in respect of what the Club paid out, was not one of the preliminary issues which was referred to the Arbitrators. If the Arbitrators had then gone on a frolic of their own, and expressed the view set out above, there would indeed have been grounds for complaint under s68. But that is not the case at all.

I have already set out in paragraph 10 above, the way in which the settlement became, and indeed was made, by Miss Masters, relevant to the Arbitration: it was part of one of the matters of alleged reliance positively put forward by Miss Masters at paragraph 45(6), which, although unpleaded, was, without objection by the Club, as appears from paragraph 45 itself, introduced by Micoperi. There was evidence, both in the witness statements for Micoperi and in cross-examination, transcripts of which have been exhibited, relating to the reasonableness of the settlement, and Counsel on both sides addressed the issue in writing. Indeed the formulation of paragraph 45(6) of the Award by the Arbitrators is taken exactly from paragraph 46(5) of Miss Masters’ skeleton argument, and the conclusions of the Arbitrators, which I have set out in paragraph 56 of the Award, are plainly derived from Mr Bright’s written closing submissions (at paragraph 53), which were themselves recited by the Arbitrators in paragraph 54 of the Award.

Paragraph 56 of the Award is in fact the conclusion of four paragraphs, specifically addressing the sixth act of reliance, as set out in paragraph 45(6), and commences with the words “Miss Masters submitted that the settlement is much too high – a view clearly held by Mr Bartolotti”. That was a submission which was (although put forward for a different purpose) very close indeed to the plea in paragraph 29(2) of Micoperi’s Amended Defence and Counterclaim that the “settlement sum was significantly higher than the level at which the Club ought reasonably to have agreed to settle Toreador’s claim”.

As a fallback argument before me, Miss Masters submits that all that was addressed before the Arbitrators was the complaint that the settlement did not adequately reflect Micoperi’s counterclaim against Toreador. But, quite apart from the fact that such would be far too pernickety a point to found an argument that the Arbitrators went outside the reference by way of a serious irregularity, in any event it seems to me not to be the case. It is certainly the fact that Miss Masters and her witnesses did not address what would have been Micoperi’s defences to Toreador’s claim in any kind of detail, but it is quite clear that, as indeed is set out in the wording of paragraph 45(6) of the Award, derived from Miss Masters’ own skeleton argument, her complaint was double-headed, both by reference to the reasonable settlement of the claim and by reference to the alleged failure to take into account the counterclaim.

If Micoperi’s position at the restored Arbitration is in any way prejudiced in relation to its complaint about the settlement, that will have arisen because of the act of Micoperi itself in making at any rate an aspect of it an issue in the Arbitration, with the inevitable consequence that the Arbitrators were entitled, if not obliged, to make findings in relation to it.

The application under s68 of the Act must be dismissed.