Every year we handle many arbitrations under the LMAA Small Claims Procedure (“SCP”). Whilst this procedure ticks a lot of boxes for clients, there are also many disadvantages which clients frequently overlook.
Let’s start with the positives for clients arbitrating under the SCP.
- It’s quick – much quicker than arbitrating under the LMAA standard terms or the Intermediate Claims Procedure. Although frequently flouted, there are word limits on submissions, disclosure takes place with submissions and expert reports (where permitted) are also limited in length and scope. One can normally expect to get an Award under the SCP within three months of initiating the procedure provided the claim is advanced properly.
- The costs are fixed at least as regards the sum to be paid to the LMAA. The legal costs can also be capped by agreement so the client has some comfort in knowing that, provided the case is not overly complex and does not require a high degree of factual or expert input, the case will cost a fixed sum to present to the Tribunal.
- The recoverable costs are capped. In other words, if the claimant loses, they know that the sum they must pay to the successful defendant will be capped. The claimant can therefore work out their best- and worst-case scenarios before they initiate the proceedings.
The above all sounds very promising which is why arbitrations under the SCP have increased dramatically over the last few years. The LMAA has also increased the threshold at which they will agree to take on small claims arbitrations. In the past it was confined to claims of up to US$50,000 but it has now been increased to cover claims of up to US$100,000. In one recent case, the arbitration clause in the charter provided for all claims irrespective of size to be governed by the SCP.
However, there are disadvantages to the SCP.
- Once initiated, the opportunity to settle the case is very limited. The initiation of the process triggers the obligation on the claimant to pay the LMAA SCP fee which is presently £4,000 or £4,350 if the LMAA is asked to appoint the arbitrator. Having paid that fee, most claimants will only consider settlement if a proposal consists of a certain sum plus their legal and arbitration costs.
- The more experienced arbitrators are increasingly reluctant to accept SCP appointments.
- The costs cap can lead to abuse of the SCP process. For example, a defendant who knows they will probably lose may intentionally seek to drive up the claimants’ costs by raising hopeless points, seeking to introduce irrelevant issues or simply by refusing to comply with the procedure.
- The more inexperienced arbitrators are inclined to overlook breaches of the procedure which drives up (irrecoverable) legal costs.
- Whilst expert reports are admissible, they are very limited and there is no real scope for the Tribunal to hear the experts being cross-examined.
- There is no real scope for in-depth analysis of the facts.
- The lack of an oral hearing leads to the parties debating the case in submissions which again drives up the costs.
- There is no appeal. That puts pressure on arbitrators faced with obscure legal arguments (something that lawyers are good at making). If they get it wrong, then there is no chance of an appeal.
When we are asked about the SCP our standard answer is that it is a rough and ready way to resolve a dispute but that clients should not expect too much. In all cases where clients come to us with claims that they wish to pursue under the SCP our advice is to consider the merits carefully and write to the opponents suggesting a compromise before initiating the procedure. Those on the tail end of a claim subject to the SCP must realise that unless they can reach a compromise, the likelihood is that the claim will not settle once the SCP process is initiated. In other words, the window for settlement is very limited in SCP. It is notable that this is borne out by the LMAA statistics: SCP appointments lead to a much higher percentage of Awards.
Constantin von Hirsch