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Mediation in Shipping

13 November 2016
– 5 Minute Read


The Baltic Dry Index, generally considered to be a benchmark for the health of the global shipping industry, has reached all-time lows in 2016. To put this into perspective, in February this year, the Index was down 98% from its peak in the 2008 shipping boom. During the shipping boom, Capesize vessels were earning up to USD200,000 per day. Reuters has recently reported that Capesize vessel earnings are currently around US$3000 per day for the Australia-China route and USD 5000 per day for the Brazil-China route. This is significantly below estimated average operating and financing costs of US$7000 per day required by shipowners to break even. Industry experts do not anticipate these numbers improving significantly over the coming years.

Clearly, given the current market conditions, it is imperative that parties maintain their relationships with key customers and retain business should they hope to survive. In the circumstances, it is clearly evident that service-providers in the shipping industry that may have a dispute with one of their clients are far more likely to attempt to reach a commercial settlement or alternatively write-off any loss rather than engage in costly court proceedings. Industry participants are making this choice as litigation is expensive and may be lengthy. There is also no guarantee that the outcome will be as anticipated and the litigation is also likely to destroy the relationships between parties, as generally in litigation there is only one real winner.

There are however, means of alternate dispute resolution which are appropriate to the shipping market, particularly given current conditions.  The first of these alternate options is to use arbitration,which is well-established in the shipping industry with the bulk of Charterparty contracts (contracts for the hire of a vessel) including an arbitration clause.  Arbitration is similar to the court process (although it is intended to be, and frequently is, faster and cheaper), with an arbitrator or an arbitration tribunal being appointed by the parties. The arbitrator or tribunal then receives a number of submissions from the parties, adjudicates on the matter and produces an award. The outcome here is similar to litigation; i.e. one party generally is “in the right” and succeeds in their claim while the other party fails. As with litigation, costs usually follow the result, with the losing party bearing the winner’s costs.

A further option for alternate dispute resolution is mediation. Mediation is commonly referred to as “assisted negotiation.” Basically, the disputing parties looking to settle a conflict appoint a neutral party, a mediator, whose task it is to assist the parties in reaching a compromise. The primary function of mediation is exploring the possibilities of a settlement between the parties, while the purpose is to bring the parties together to allow them to reach a solution of their own making. To that end, the role of the mediator is not to pass judgment as is the case in court or in arbitration; rather, the mediator is present to guide the negotiation between the parties and to facilitate their reaching a settlement which is of benefit, in so far as possible, to both parties. Fittingly mediation envisages a “mutual gains outcome” rather than a winner-loser outcome.

There is no one procedure for conducting a mediation, usually the parties and the mediator will gather at a chosen venue for an agreed period, a day, two days or sometimes more depending on how the mediation progresses. The parties will meet with the mediator separately, and thereafter both parties will meet with the mediator together, who will then facilitate the settlement discussions. It is the mediator’s job to motivate, provide alternate viewpoints, and to illustrate (privately) to each party the weaknesses in its own position, thereby paving the way for a compromise solution. It is generally not required that the mediator be an expert in the particular field of dispute (for example, the ins and outs of shipbuilding or ship repair contracts), however a working knowledge of the sector is preferable to allow the mediator an understanding of how the dispute arose.

The primary advantages of mediation are that it is usually quick, relatively inexpensive and flexible, as well as clearly assisting in maintaining working relationships between the parties involved in a dispute after it is resolved. In addition, mediation is confidential and everything said between the parties is without prejudice to their other legal remedies in the event the mediation fails.  Even where mediation does not result in an immediate settlement, it can narrow the issues in dispute which in turn, could result in a quicker trial or arbitration should the parties institute either of those proceedings.

While mediation has previously struggled for acceptance in the shipping industry, particularly given the historical use of arbitrations, it appears that the industry is beginning to recognize mediation as a viable means of resolving disputes. Mediation clauses now increasingly appear in commercial maritime contracts, like Charterparties, insurance policies, LOF 2000 and even the new BIMCO Standard Ship Repair Contract.  This rate of growth looks set to continue. As a quick, cost effective means of resolving disputes, mediation ought to be incorporated into the industries’ general conflict resolution procedures.

* This article first appeared in the Sunday Tribune