Cadogan Maritime Inc v Turner Shipping Inc

The Claimant (“Cadogan”) seeks a declaration under section 68(3) (c) of the Arbitration Act 1996 (“the Act”) that an Additional Arbitration Award of Mr Robert Gaisford dated 16 July 2012 (the “Additional Award”) is of no effect and permission to appeal against the Additional Award under section 69 and (should its application for leave to appeal succeed) an order that the Additional Award be set aside under section 69(7) (d).

The Additional Award was the second award to be made in an arbitration between Cadogan (the Respondent in the arbitration) and the Defendant to these proceedings (“Turner”, the Claimant in the arbitration). The Additional Award was purportedly made pursuant to the Tribunal’s powers under section 57 of the Act, following an application by Turner under this provision.

It is Cadogan’s case that, by making the Additional Award, the Tribunal:

The underlying dispute between the parties arose out of the sale of a new-build vessel (“Hull 3029”) by Turner to Cadogan, pursuant to a memorandum of agreement dated 21 June 2007 (the “MOA”). The first instalment of the purchase price, in the sum of US$7.7 million, was paid to Turner by or on behalf of Cadogan on 5 July 2007. In return, Turner provided Cadogan with a refund guarantee for the same sum (the “Refund Guarantee”). The Refund Guarantee was issued by Banque Degroof, and dated 2 July 2007.

In October 2009, Cadogan contended that Turner was in repudiatory breach of the MOA, and made a demand under the Refund Guarantee. In November 2009, and pursuant to a joint instruction from the parties, Banque Degroof paid the US$7.7 million, plus the interest on that sum that had by that time accrued (in the sum of US$923,520.77; the “Accrued Interest”) into an escrow account (the “Escrow Account”), pending the resolution of the arbitration proceedings that had since been commenced by Turner. Additional sums were later paid into the Escrow Account by way of security for costs.

In the arbitration proceedings, Turner claimed a declaration that Cadogan had not been entitled to make any demand under the Refund Guarantee. It further contended that Cadogan had committed repudiatory breaches of the MOA, which it had accepted. In relation to that claim Turner sought a declaration that it was entitled to retain the US$7.7 million purchase price paid by or on behalf of Cadogan. Further or alternatively, Turner claimed damages for loss of bargain, in the sum of US$6 million.

Cadogan denied Turner’s claims. Cadogan’s primary case was that it was entitled to avoid the MOA on the grounds of fraudulent or negligent misrepresentation, alternatively to treat it as having been repudiated by Turner, which repudiation Cadogan accepted. In the event that it lost on these issues and Turner’s claim for breach of contract succeeded, Cadogan claimed restitution of the first instalment of the purchase price, less any damages awarded to Turner.

The Tribunal comprised Mr Mark Templeman Q.C. and Professor Marco Lopez de Gonzalo as arbitrators, and Mr Robert Gaisford as umpire. Following the evidentiary hearing, Mr Templeman Q.C. and Professor Lopez were unable to agree, with the result that it fell to Mr Gaisford to determine the issues in dispute. References to the “Tribunal” in this judgment are, in consequence, references to Mr Gaisford alone.

The Tribunal published its First Final Arbitration Award (the “First Award”) on 8 June 2012. In the First Award, the Tribunal rejected Cadogan’s claims for both misrepresentation and breach of contract, and held that Cadogan had committed repudiatory breaches of the MOA, which Turner had accepted.

The Tribunal rejected Turner’s claim to retain the US$7.7 million purchase price, but granted its claim for damages in the sum of US$6 million, with interest thereon to run from 30 November 2009. It ordered that these sums, together with any costs later awarded to Turner (this issue being reserved for future determination) be paid from the Escrow Account but that Cadogan was entitled to claim any balance in the Escrow Account in restitution.

Following publication of the First Award, Turner made an application to the Tribunal under section 57 of the Act. Turner claimed that it, and not Cadogan, was entitled to the sum of the Accrued Interest, and that the First Award should be corrected, or an additional award made, in order to reflect this.

On 16 July 2012, the Tribunal published the Additional Award, which acceded to Turner’s application. It ordered that the sum of the Accrued Interest, US$923,520.77, be paid to Turner out of the Escrow Account.

The formal, dispositive parts of the First Award were expressed as follows:

In the Reasons forming part of the First Award the Tribunal’s conclusion on liability was:

“116.

In the circumstances, therefore, I reject the argument that Turner were in repudiatory breach when Cadogan purported to accept it and it follows that Cadogan were themselves in repudiatory breach and Turner were entitled to accept the same when they did on 23 December 2009. Consequently, they are entitled to damages for Cadogan’s repudiation.”

The Tribunal’s findings on damages were:

“117.

Turner claimed that they were entitled to retain the US$7.7m, representing the first instalment of the purchase price but, alternatively, maintained that they had suffered loss and damage by way of loss of bargaining in the amount of US$6m. This is based on the difference between the purchase price for the vessel of US$38.5m and the price achieved when the vessel was sold to a third party, Spar Shipping AS, for US$32.5m.

118.

Cadogan, for their part, contended that in such circumstances (i.e. where they were found liable for repudiatory breach) Turner were entitled to be compensated in the amount of US$6m but were not entitled to keep the balance of the first instalment and that the sums held in escrow should be paid out as follows:-

(1)

US$6,000,000,00 to Turner

(2)

US$1,700,000.00 to Cadogan; and

(3)

Accrued interest paid out pro-rata

119.

The circumstances in which Turner would be entitled to retain the instalment of US$7.7m are set out in clause 13 of the MOA which provides as follows:-

Buyers’ default

Should the payments under Clause 17 not be paid in accordance with Clause 17, the Sellers have the right to cancel this Agreement and Bank Refund Guarantee, referred to in Clause 17 herein, in which case the Buyers shall forfeit all payments made under Clause 17. If theses payments do not cover their losses the Sellers shall be entitled to claim compensation for their losses and for all expenses incurred together with interest from the Buyers and their guarantors.

Those circumstances do not apply here since Cadogan had paid the first instalment in accordance with clause 17 and the next instalment was not due until March 2010 and consequently, there is no contractual right for Turner to retain the first instalment. Turner are, however, entitled to damages and I agree that the quantum of those damages is US$6m being the difference between the purchase under the MOA and the price for which the vessel was sold to Spar Shipping AS. However, they are also entitled to interest on that sum and I consider that interest should be awarded to run from 30 November 2009 (by which date the amount of the first instalment had presumably been paid into the escrow account) at the rate of the three-month US$ LIBOR plus 2.5%, compounded at three-monthly rests, which I consider to be a fair commercial rate of interest for the period in question, up to the date of payment.

120.

Since the amount of US$7.7m was paid in accordance with clause 17 of the MOA as “security for the correct fulfilment” of that agreement, the said principle sun of US$6m together with the said interest should be paid out of the first instalment which is now in the Escrow Account. Any balance remaining in the Escrow Account after payment of these sums, is to remain there until determination of the question of liability for and quantum of costs. Thereafter, any remaining balance is to be paid to Cadogan by way of restitution.”

The Tribunal held that it had power to make an additional award under section 57 as the Accrued Interest claim had been overlooked. It was found as follows:

“I. Having considered the parties’ arguments there is no doubt in my mind but that I must accede to Turner’s application and I regard Cadogan’s position as more than a little opportunistic. The bare facts of the position are these:-

(1)

Cadogan made a wrongful demand under the Refund Guarantee established by Turner in respect of the first instalment of the purchase price on 20 October 2009 demanding payment in the sum of US$7,700,000.00 “together with interest calculated at the rate stipulated in the Shipbuilding Contract … from the date of the payment of the said instalment to the date of remittance of such refund …”.

(2)

Court proceeding ensued and the parties made the Escrow Agreement pursuant to which US$7,700,000.00 together with the Accrued Interest was paid into the Escrow Account.

J. In a way, it might be said that it is implicit in my First Award that, as a result of my findings, the Accrued Interest should plainly be returned to Turner, being interest to which they were at all times entitled but was only paid into the Escrow Account as a result of the wrongful demand on Banque de Groof. However, I am aware, as author of my First Award, that regrettably I overlooked dealing with the Accrued Interest. Cadogan argued that Turner never claimed it but I cannot accept that argument. For example, paragraph 77 of Turner’s outline closing submissions contained an application for a declaration that Turner is entitled now to all sums in the Escrow Account and asked for an order that Cadogan do all things necessary to procure payment of those sums to Turner. Given my determinations in my Final Award it must follow that the Accrued Interest should be returned to Turner and I can see no conceivable basis on which Cadogan could or should be entitled to it. The Accrued Interest belonged to Turner; it was paid into the Escrow Account as a result of Cadogan’s wrongful demand under the Refund Guarantee; Cadogan has no entitlement to it whatsoever and it should accordingly be returned to Turner together with interest. As to the latter, while I am tempted to award it from 18 November 2009 when, it now appears, the sum was actually paid into the Escrow Account, I do not consider that I can properly do so since this would be based on evidence adduced by Turner after my award was made, which I do no consider is strictly admissible. I therefore consider that it should be treated in the same way as the interest on damages that I have awarded.

K. I therefore consider that this is a case where I should make an additional award in this respect, since I failed to deal with it in my First Award.”

The Tribunal commented that Cadogan’s claim was “more than a little opportunistic”. That was fair comment in the light of his conclusion that he could see “no conceivable basis upon which Cadogan could or should be entitled” to the Accrued Interest and that it had “no entitlement to it whatsoever”. Cadogan’s application to seek permission to appeal from that conclusion was dismissed on the grounds that the Tribunal’s decision was not “even open to serious doubt”. I agree. Up until the termination of the MOA Turner had a contractual entitlement to the US$7.7 million and could deal with it as it wished. In the event it was prevented from doing so by Cadogan’s wrongful demand under the Refund Guarantee which resulted in the principal sum and the Accrued Interest being paid into the Escrow Account. Cadogan itself only had a claim in restitution because in the event Turner’s damages claim was for a lesser sum than US$7.7 million. That claim did not accrue until termination of the MOA, by which time all the Accrued Interest had been earned. Although Cadogan submits that it is irrelevant to its application, it is striking that no legal justification for a substantive claim by it for the Accrued Interest has been identified.

Cadogan’s applications under sections 68 and 69 of the Act both relate to the scope of the Tribunal’s powers under section 57, and specifically section 57(3). This provides as follows:

“The tribunal may on its own initiative or on the application of a party –

(a)

correct an award so as to remove any clerical mistake or error arising from an accidental slip or omission or clarify or remove any ambiguity in the award, or

(b)

make an additional award in respect of any claim (including a claim for interest or costs) which was presented to the tribunal but was not dealt with in the award.”

Cadogan contends that the Tribunal acted in excess of its powers under section 57 and/or misinterpreted those powers by making the Additional Award.

Cadogan’s primary case is that Turner did not make a claim in the arbitration for the Accrued Interest. In consequence, the Tribunal had no power to make the Additional Award under section 57(3) (b) of the Act.

Alternatively, even if Turner did make a claim in the arbitration for the Accrued Interest, Cadogan submits that the claim for the Accrued Interest was dealt with in the First Award. In consequence, the Tribunal had no power to make the Additional Award under section 57(3) (b).

Section 57(3)(b) covers claims “presented” to the tribunal; no particular formality is required. Provided that the claim is before the tribunal and would reasonably be expected to be determined it does not matter how the claim has been placed before the tribunal. It does not, for example, have to be a claim set out in written pleadings or submissions.

In the present case, in its Particulars of Claim Turner recorded at paragraph 38:

“The purported demand for payment under the 3029 Refund Guarantee claimed the amount of US$7,700,000 plus interest of US$923,520.77, viz. a total of US$8,623,520.77.”

The demand was therefore for both the principal sum of US$7.7 million and the Accrued Interest. At paragraph 48 of its Particulars of Claim, Turner claimed “a declaration that the Respondent is not and was not entitled to make any demand under the 3029 Refund Guarantee”. That declaration covered Cadogan’s claim to both the principal sum and the Accrued Interest. Turner also claimed consequential “further and/or other relief”. It therefore made a claim for relief in respect of Cadogan’s allegedly wrongful demand for principal and Accrued Interest under the Refund Guarantee.

By paragraph 17 of its Reply and Defence to Counterclaim served on 23 December 2009, Turner contended that the wrongful demand constituted a repudiatory breach of the MOA by which Turner had agreed to sell and Cadogan had agreed to buy the Vessel for a purchase price of US$38.5 million, which repudiatory breach Turner accepted as bringing the MOA to an end.

By paragraphs 169 and 170 of their Opening Submissions at the arbitration, Turner contended that Cadogan was in manifest and continuing repudiatory breach of contract and that it had accepted the same as bringing the MOA to an end, and Turner sought declaratory relief accordingly. Turner maintained this case at paragraphs 2 to 25 of its Closing Submissions.

At paragraph 77 of its Closing Submissions it claimed a declaration that it was “entitled now to all sums in the escrow account”.

Turner submits that paragraph 77 alone showed that its claims included a claim for the Accrued Interest. However, this is all the clearer when considered against the background of its claim for a declaration that the Refund Guarantee demand for both principal and Accrued Interest was wrongful and for consequential further and other relief.

Cadogan submits that it was not sufficient for Turner simply to claim “further or other relief”. If it intended that relief to relate specifically to Accrued Interest, it had to so specify. It further submits that, when construed in its proper context, the claim made in paragraph 77 of the Closing Submissions was limited to the principal sum and monies provided for security for costs.

The immediate context of paragraph 77 was as follows:

“76.Turner thus seeks a declaration at this stage that it is entitled to retain the US$7.7 million representing the first instalment of the purchase price.

77.

The escrow account contains this money and monies provided by way of security for costs. The declaration should make clear that Turner is entitled now to all sums in the escrow account, and it would be prudent further to order that Cadogan do all things necessary to procure payment of those sums to Turner.

78.

Further or alternatively, Turner has suffered loss and damage by way of loss of bargain in the amount of US$6 million, and with costs and interest, the amount in the escrow account may be insufficient.”

It is Cadogan’s case that:

In my judgment this is an unduly narrow and technical construction of the claims being made. This was an arbitration rather than court proceedings. Arbitration is rightly a less formal process and concentrates on substance rather than form.

In the present case, Turner’s claims included a claim for “all sums” in the Escrow Account. That is literally sufficient to embrace a claim for the Accrued Interest. Further, Turner had always had a claim for a declaration and further and other relief in respect of the consequences of the wrongful demand on the Refund Guarantee, which demand covered both the principal sum and the Accrued Interest. Yet further, if Turner was entitled to the US$7.7 million then, as Cadogan would have well understood and did not challenge, it was necessarily entitled to the Accrued Interest. There can have been no sensible reason for Turner not pursuing that claim, or, to put it another way, excluding it from its claim for “all sums” in the Escrow Account. Both a literal and a purposive construction leads to the same conclusion: the claim for Accrued Interest was included, as the Tribunal concluded.

Further, Cadogan’s own case acknowledged that Turner had a claim in respect of the Accrued Interest if Cadogan’s case on repudiation succeeded.

In paragraphs 54.1 and 56 of Cadogan’s Closing Submissions, Cadogan submitted that, if the Tribunal accepted that there had been a fraudulent misrepresentation, it should dismiss Turner’s claim and declare that (1) Cadogan was entitled to and has rescinded the MOA for misrepresentation, and (2) the sums paid into the Escrow Account, “consisting of the deposit of US$7,700,000 and interest of US$923,520.77,” plus any interest accrued in escrow, be paid to Cadogan. If, however, there was no misrepresentation, but Cadogan was nonetheless entitled to terminate the MOA, Cadogan submitted that it was entitled to “restitution of the sum paid plus interest” – i.e. the same result.

By way of an alternative case, if it was not entitled to avoid or terminate the MOA, and Turner was entitled to terminate it on account of breach by Cadogan, Cadogan argued that it was nonetheless entitled to restitution of the sum of US$1.7 million, being the difference between the amount of the first instalment of the purchase price and the loss incurred by Turner in the resale of the Vessel, and also to a pro-rata share of the interest accrued on the first instalment. Specifically, at paragraph 57.3 of their Closing Submissions, Cadogan submitted that:

“In this scenario, the sums held in escrow should be paid out as follows:

This alternative case was recorded by the Tribunal in paragraph 118 of the First Award.

Cadogan submits that that submission was only referring to interest accrued after payment into the Escrow Account and not to the Accrued Interest. If so, it would follow that it was making no claim itself for the Accrued Interest, thereby acknowledging Turner’s entitlement to it. If that is the case then the Additional Award would reflect what was common ground between the parties.

In any event, I reject Cadogan’s submission. In my judgment the submission was referring to all accrued interest, including the Accrued Interest. The submission is expressed in general rather than limited terms. Those general terms are not only wide enough to cover all accrued interest, but must sensibly be construed as so doing since otherwise the prior accrued interest is not being addressed at all. Further, there is no obvious reason for Turner treating the interest differently before and after the setting up of the escrow account, unless it was conceding Turner’s entitlement to the prior interest.

On Cadogan’s own case Turner therefore had a claim for the Accrued Interest “in this scenario”, albeit one which it contended should be limited to a pro-rata share of that interest.

The issue of who was entitled to the Accrued Interest, in what proportion and on what basis was therefore on any view a matter before the Tribunal and one that had to be determined.

For all these reasons I find that the claim for Accrued Interest was one which was “presented to the tribunal” within section 57(3) (b) and that the Tribunal was correct so to conclude.

A claim is “dealt with” in an award if it has been finally determined by it. Although the dispositive part of the award is likely to be the most important part of the award for the purpose of considering that issue, where, as is almost invariably the case, the written reasons form part of the award, the whole of the award needs to be considered, and the dispositive part of the award considered in the context of the written reasons.

Cadogan submits firstly that Turner’s primary claim for relief – which included a declaration that it was entitled to “all sums in the escrow account” – was rejected by the Tribunal. As a result, and even if Turner could be said to have made a claim for the Accrued Interest by these words, that alleged claim was dealt with, and dismissed, in the First Award. It was not open to the Tribunal, pursuant to section 57(3) (b), to reopen this aspect of its judgment.

Secondly, Cadogan submits that the relief which the Tribunal did afford to Turner and Cadogan made clear how the contents of the Escrow Account – including the Accrued Interest – should be allocated between the parties:

The sums to be awarded to Turner were thus capped at US$6 million in damages, interest on that sum, and any costs later awarded to it. Cadogan, in turn, was awarded “any balance in the Escrow Account” after payment of these sums to Turner. The Tribunal chose not to narrow the meaning of “balance” in this context to, for example, “the balance of the first instalment”. The Tribunal’s words can, in consequence, only have one meaning: namely, that Cadogan was entitled to the entirety – including the Accrued Interest – of the balance in the Escrow Account.

In relation to Cadogan’s first point, it is correct that Turner’s claim for a declaration that it was entitled to retain the US$7.7 million failed. Any claim for Accrued Interest consequential upon that claim accordingly also failed. However, as already found, Turner had a claim for a declaration and for other relief in respect of the wrongful demand under the Refund Guarantee for both the principal sum and the Accrued Interest and was claiming “all sums” in the Escrow Account. Further, the fact that Turner had a claim to some or all of the Accrued Interest even if its retention claim failed was recognized and acknowledged by Cadogan’s own submissions. That claim, and Cadogan’s mirror image claim, was not determined as a result of the dismissal of Cadogan’s retention claim. Who was entitled to the Accrued Interest, in what proportion and on what basis therefore remained a matter to be determined by the Tribunal notwithstanding the dismissal of the retention claim.

In relation to Cadogan’s second point, despite the fact that the issue of who was entitled to the Accrued Interest, in what proportion and on what basis remained a matter to be determined by the Tribunal, it was not dealt with expressly in the dispositive parts of the Award. Although the Tribunal found that Cadogan was entitled to a declaration that the demand on the Refund Guarantee was wrongful, in dealing with consequential relief it only expressly addressed the principal sum demanded. This is reflected in the Reasons and in particular paragraph 120 where what is to happen to the “balance” held in the Escrow Account is addressed solely by reference to the principal sums. In my judgment, properly construed the dispositive parts of the Award deal with the “balance” of the Escrow Account in relation to the principal sum, but not the Accrued Interest. Further, to construe the dispositive parts of the Award as implicitly determining that Cadogan was entitled to the Accrued Interest would mean construing it as awarding Cadogan a sum which, on the Tribunal’s findings, it not only had no entitlement to, but was not even claiming (since its claim was for a pro-rata share only), a result which cannot sensibly have been intended. This is all the more so when one considers the plain inconsistency that would be created thereby with the declaration made in the same section of the Award that the demand under the Refund Guarantee was wrongful.

For all these reasons I find that the claim for Accrued Interest was not “dealt with” in the Award and that the Tribunal was correct so to conclude. As Mr Gaisford stated, it was “overlooked”.

It follows that the Tribunal did have power to make the Additional Award under section 57(3)(b). If so then both the section 68 and the section 69 applications must fail.

Turner had a further point that even if there was no section 57 power and therefore a serious irregularity under section 68(2)(b) no substantial injustice had been caused thereby since Cadogan has no legal entitlement to the Accrued Interest.

Section 68 of the Act is only engaged by “serious irregularity”, defined in section 68(2) as an irregularity “which the court considers has caused or will cause substantial injustice to the applicant”. In Lesotho Highlands v Impregilo SpA [2005] UKHL 43, [2005] 3 All ER 789, at paragraphs 28 and 35, Lord Steyn observed that section 68 impose on an applicant a requirement to establish that an irregularity has caused or would cause substantial injustice to the applicant, and that this “pre-condition” was “designed to eliminate technical and unmeritorious challenges”. The requirement was not satisfied on the facts of the case before the House (with respect to pre-award interest), as the applicant in that case could not show that the outcome might realistically have been a different in the absence of any irregularity.

Turner submits that Cadogan’s challenge in the present case is a technical and unmeritorious one to which section 68 does not apply. In the circumstances, it has caused no injustice to Cadogan that the Tribunal has now addressed the specific status of interest accrued on the first instalment and held in the Escrow Account, which was set up to abide the arbitration before him. Cadogan can advance no substantive basis of entitlement to this interest in light of the conclusions of the Tribunal in the First Award.

It is not necessary to decide this further question. However, whilst I agree that Cadogan’s challenge is unmeritorious, if the Tribunal had no power to make the Additional Award I am not sure that it is an answer to the section 68 claim to say that the award should not be set aside because it was rightly decided on the substantive merits. No award should have been made at all, rightly or wrongly. Further, if the reason that section 57 did not apply was that the matter had been dealt with in the First Award the effect of setting the Additional Award aside would be to leave Cadogan with a right to enforce its claim to the balance of the sums in the Escrow Account in accordance with the terms of the First Award. To deprive it of the right to seek to do so could be said to involve substantial injustice.

The answer in such a case would be for Turner to make an application for the First Award to be set aside and remitted so that the Tribunal could redress what has been admitted to be a mistake. There has long been a jurisdiction to remit in cases of admitted mistake – see, for example, The Montan [1985] 1 Lloyd’s Rep. 189. That jurisdiction is reflected in section 68(2)(i) of the Act. Turner would no doubt have a strong case for such relief but unless and until it was obtained Cadogan would be entitled to rely on the First Award as it presently stood.

For the reasons outlined out above both Cadogan’s applications must be dismissed.