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Arbitration Decisions: Finality May Not Always Be Best
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October 26, 2009
(This paper first appeared in the March 2009 edition of Decisions, Decisions, Howrey’s dispute resolution and international arbitration newsletter.)
By Markus Esly
Howrey LLP
One of the advantages of arbitration over litigation is that arbitration offers greater certainty and finality. The aim of arbitration is to resolve disputes as swiftly as possible without long-running appeals. Once the tribunal has delivered the award, both parties know where they stand. They can put the dispute behind them and move on.
There is a potential downside to this. The losing party in any arbitration may wish that it had an avenue of redress against the award, especially if the decision of the arbitrator seems hard to justify or even aberrant. The risk of an unsatisfactory award (as distinct from an unsatisfactory outcome) can be minimised by appointing a competent, experienced (or even trusted) tribunal. Counsel for the parties should do their part, too, by giving a realistic assessment of the strengths and weaknesses of the claim. Weak claims should not be allowed to proceed to a full hearing before the tribunal. In most cases, a settlement ought to be possible as there is always an element of risk present for both sides. While that is the theory, some of the challenges to arbitral awards recently made in the courts suggest that best practice is not always followed or that some losing parties might be inclined to have one more go before a judge to see if they can get out of the award.
In this article, we look at recent examples of court challenges to arbitral awards. We review the main arguments usually raised in these challenges, look at whether these have merit and examine how the supervisory function of the courts, intended to prevent any real serious miscarriages of arbitral justice, works in practice.
The Two Types Challenges to Awards
Challenges to awards can be divided, broadly speaking, into two categories.
First, a party may assert that the arbitrator made an error of law that ought to be corrected by the court.
Second, something may have gone wrong with the procedural aspects of the arbitration, leading to a party complaining of a serious irregularity or a breach of natural justice.
Applications falling into the second, procedural, category can be made either to the courts in the place that was the seat of the arbitration (under the supervisory jurisdiction of the courts over arbitrations that are conducted within the jurisdiction) or when a foreign award is enforced. The principles that apply in both these cases tend to be similar. Indeed, they are internationally recognised.
Error of Law
When it comes to applying the law, arbitrators generally have the last word. It is very difficult, if not impossible, in many jurisdictions to ask the courts to review an arbitral award because of the legal reasoning adopted by the tribunal.
No appeal on a point of law is possible under the UNCITRAL Model Law. If the seat of the arbitration is in a jurisdiction where national arbitration laws follow the Model Law, then it will not be possible to overturn an award on the basis that the arbitrator’s legal reasoning was faulty -- and that is so even if in the eyes of the aggrieved party, a first year law student could have done better. That is the position in most of the jurisdictions where significant numbers of arbitrations have their seat, such as France, Sweden, Hong Kong and Switzerland.
The position in England, however, differs somewhat. Section 69 of the Arbitration Act 1996 preserves a narrow right to appeal on a point of law, but this is subject to a number of requirements and restrictions. Unless both parties to the arbitration agree, the court’s permission is required to review any point of law decided by an arbitrator. Permission will only be granted if:
|  | Determining the question of law will substantially affect the rights of one or more parties,
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| | The tribunal was asked to decide the relevant point of law,
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| | Based on the tribunal’s findings of fact, the decision was either obviously wrong, or the point is one of general public importance and the arbitrator’s decision is at least open to serious doubt, and
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| | Despite the parties having chosen arbitration, it is just and proper in all the circumstances for the court to determine the question.
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These requirements are not easily satisfied. The English courts have made no secret of the fact that they will strive to uphold arbitral awards, respecting the dispute resolution procedure chosen by the parties. In London Underground Ltd. v. Citylink Telecommunications Ltd. [2007] EWHC 1749 (TCC), Ramsey J described the approach the High Court would take as follows:
As a matter of general principle, the courts strive to uphold arbitral awards: they should be read in a reasonable and commercial way expecting that there will be no substantial fault to be found with them: see per Bingham J in Zermalt Holdings SA v. Nu-Life [1985] 2 EGLR 14: “As a matter of general approach, the courts strive to uphold arbitration awards. They do not approach them with a meticulous legal eye, endeavouring to pick holes, inconsistencies and faults in awards, and with the objective of upsetting or frustrating the process of arbitration. Far from it. The approach is to read an arbitration award in a reasonable and commercial way, expecting, as is usually the case, that there will be no substantial fault that can be found with it.”
The fundamental principle underlying the Arbitration Act 1996 is “party autonomy,” meaning that the parties can by agreement fashion their arbitration proceedings in the manner they see fit. In line with this, it has long been recognised that the parties can agree to exclude the right to appeal on a point of law under Section 69. The well-known international rules of arbitration of the International Chamber of Commerce and the London Court of International Arbitration, for instance, exclude any right to challenge an award on the law.
One may ask: but is there a breach of natural justice in giving up any redress because an arbitrator has made an error of law? Does a final determination of an important point of law by a court, and not the arbitrator, amount to a fundamental right? That point was considered by the Court of Appeal two years ago, when an arbitration clause excluding any appeal was challenged as contravening the right to a fair trial.
Article 6 of the European Convention on Human Rights (incorporated into English law by the Human Rights Act 1998) provides:
in the determination of his civil rights and obligations... everyone is entitled to a fair and public hearing within a reasonable time by an independent and impartial tribunal established by law....
In Sumukan Limited v. Commonwealth Secretariat [2007] EWCA Civ 243, the Court of Appeal had no difficulty in finding that an arbitration clause excluding an appeal to a court on a point of law under Section 69 of the Arbitration Act 1996 did not breach Article 6 of the ECHR. The clause had been challenged as being, in essence, an exclusion clause since the provision removed a party’s right to redress.
The Court of Appeal confirmed that the arbitration clause had been incorporated into the contract, applying ordinary principles of contract law. It was not an unusual or onerous provision, and there was no need for any kind of special notice as might be needed for a draconian exclusion clause. The court was quick to note that the arbitration provision applied equally to both parties and was of a kind often agreed to by businessmen. It was not inconsistent with Article 6 of the ECHR. In considering whether the requirements of the right to a fair trial were met, the court noted that there was an absence of constraint and that arbitration offered advantages to the parties. The right to appeal on a point of law did not go to the root of Article 6, and waiving it was an accepted practice in international commerce. The decision in Sumukan thus illustrates that the English courts will robustly defend party autonomy, especially in a commercial context.
Procedural Challenges – Jurisdiction and Serious Irregularities
The parties may challenge an award for procedural reasons, either because the tribunal had no jurisdiction (under Section 67 of the Arbitration Act 1996), due to a serious irregularity affecting the proceedings (Section 68) or by objecting to enforcement of the award on similar grounds (under Section 103).
There may be grounds for procedural challenges if the tribunal was biased, if the tribunal failed to give a party a reasonable opportunity to address the issues, the arbitration agreement was invalid or did not bind one of the parties, the tribunal decided something that was not referred to it by the parties or failed to deal with all the issues, or the arbitrators failed to respect a procedural agreement reached by the parties. This is not an exhaustive list but is intended to give a flavour of the kind of procedural complaint that can be well-founded.
Again, succeeding in such a procedural challenge is no easy task. In Lesotho Highlands v. Impregilo SPA [2005] 3 WLR 129, Lord Steyn was clear that establishing a serious irregularity under Section 68 was a high threshold. In addition, a substantial injustice also must be shown to the court’s satisfaction, which Lord Steyn noted was “designed to eliminate technical and unmeritorious challenges.” The courts will need to be convinced of a real, grave procedural error on the part of an arbitral tribunal before a challenge succeeds.
Example Challenge 1: Validity of the Arbitration Agreement
A recent decision of the High Court illustrates that when arbitral tribunals are seen to have gone too far, the courts will intervene. The case arose out of an application to the High Court to enforce an ICC award that had been made in Paris. In Dallah Real Estate and Tourism Holding Co. v. The Ministry of Religious Affairs, Government of Pakistan [2008] EWHC 1901 (Comm), Aikens J held that the arbitration agreement in question was not “valid” under Section 103 of the Arbitration Act 1996 and the award was unenforceable as a consequence. Enforcement of foreign arbitral awards is subject to the New York Convention 1958, laying down an almost global framework for the reciprocal enforcement of awards made in signatory states. Of course, a valid (and binding) arbitration agreement is the cornerstone of every enforceable award.
In the Dallah arbitration, the arbitrators believed that a state entity (the government of Pakistan) should be bound by an arbitration clause, but they reached that conclusion on the basis of applying rather amorphous principles that did not find favour with Aikens J.
The dispute concerned a trust created under a Pakistani statute as a corporation capable of entering into contracts under Pakistani law. The trust entered into a construction contract concerning accommodation for pilgrims to Mecca. The contract provided for ICC arbitration in Paris. After the contract, the Pakistani legislation under which the trust had been established lapsed in late 1996. This meant the trust ceased to have legal personality. In January 1997, the Pakistan Ministry of Religious Affairs, which had been involved in the transaction with the contractor, stated that the contractor was in breach and sought to terminate the contract. Dallah Real Estate then began an ICC arbitration in Paris against, essentially, the government of Pakistan (but not the trust). The government of Pakistan contested jurisdiction.
The arbitral tribunal, which included Lord Mustill, found that it had jurisdiction and that the government was bound by the arbitration agreement. The tribunal then went on to award Dallah damages. On jurisdiction, the tribunal explained that it reached its conclusion:
by reference to those transnational general principles and usages reflecting the fundamental requirements of justice in international trade and the concept of good faith in business.
Reading between the lines, the tribunal seems to have thought that the government should not be allowed to use national laws to extinguish contractual liabilities that it no longer liked. As to the actual basis of their decision, the arbitrators noted that:
Arbitral as well as judicial case-law has widely recognised that, in international arbitration, the effects of the arbitration clause may extend to parties that did not actually sign the main contract but were directly involved in the negotiation and performance of such contract, such involvement raising the presumption that the common intention of all parties was that the non-signatory party would be a true party to such contract and would be bound by the arbitration agreement.
Despite initial reservations by Lord Mustill and another arbitrator as to these principles, in the end the arbitrators agreed that holding the government liable was in line with “the general justice of the case.” As we will see, the High Court did not read the evidence in this way.
The government of Pakistan resisted enforcement of this award before the English courts on the grounds that the arbitration agreement was invalid. Aikens J agreed. He held that the question of validity of the arbitration clause had to be resolved according to French law -- the law of the place where the award was made. 1/ Validity of the arbitration clause had to be tested by reference to a recognised national system of law that applies to the arbitration but not "transnational principles," which Aikens J criticised because these were so hard to pin down:
Even assuming that the French court would consider, as part of the overall equation, principles of “transnational law”, the parties have not adduced any evidence nor identified any specific principles that might be brought into account in this case. I note that the arbitrators refer in their Reasons to “transnational general principles and usages”. But, these are left on a high level of generality. It is said that these reflect “the fundamental requirements of justice in international trade and the concept of good faith in business”. With respect, I have concluded that this does not add anything to the exercise I have to undertake.
Applying French law, as agreed between the parties’ respective experts (foreign law being an issue of fact that has to be established by expert evidence), meant looking for the subjective common intention of the parties. Aikens J went into a fair amount of detail as regards the evidence:
To recall: the parties agree that, as a matter of French law, the underlying question to be considered when deciding whether a party is bound by an arbitration clause is: was the subjective common intention of all the parties that the relevant party should be bound by the arbitration clause? I have to consider whether the relevant party was directly implicated in the underlying contract and any disputes arising out of it. I have to consider the respective contractual situations of the parties and their existing commercial relations. I have to decide whether the relevant party was aware of the existence and scope of the arbitration clause by which it is said that party is bound. I must also bear in mind the fact that the relevant party sought to be bound in this case is a state entity and that, if it were bound, it might thereby lose its immunity from suit and enforcement. I must take account of the doctrine of good faith. In doing all this I have to analyse the whole chronology, from beginning to end. On the evidence before me, my conclusion is that it was not the subjective intention of all the parties that the GoP should be bound by the Agreement or the arbitration clause. In fact, I am clear that the opposite was the case from beginning to end. That is why the GoP distanced itself from the contractual arrangements in the Agreement and that is why it sought to argue from the time of the Termination Letter that the Agreement was void and illegal. As for the doctrine of good faith, I accept that the parties are obliged to act in good faith. But I do not see how the doctrine can carry matters any further. There is no evidence that the GoP acted in bad faith at any stage. Even if it did, that could not make it a party to the arbitration agreement.”
That approach, of a re-hearing of evidence rather than a more limited review of the tribunal’s decision, was the subject of criticism by counsel for Dallah, who had urged the court not to engage in a lengthy analysis of matters already argued before the tribunal. But Aikens J concluded that the language of the Arbitration Act 1996, which required the party challenging the award to “prove” that the arbitration clause was invalid, meant that the court had to hear all the evidence by which that party contended that it could prove invalidity. Dallah is presently the subject of an appeal, and the question of the scope of the court’s enquiry when lack of jurisdiction is alleged, among the other more specific issues, might benefit from some clarification. Meanwhile, the first instance decision serves as a warning to arbitrators not to depart from the applicable law in favour of relying on transnational principles that, while they may be “en vogue” in certain academic quarters, remain amorphous and introduce an element of unpredictability.
Example Challenge 2: Failure to Deal With All the Issues
One of the grounds for challenging an award under Section 68 of the Arbitration Act 1996 is that the arbitrator failed to deal with all the issues that fall to be decided. That particular ground succeeded in respect of an award in a rent review arbitration, which the High Court remitted back to the arbitrator for correction in Metropolitan Property Realizations Ltd. v. Atmore Investment Ltd. [2008] EW HC 2925.
The award in question included a specific acceptance by the arbitrator that rent ought to include an element of profit, as had been submitted to him. However, the arbitrator then went on to calculate the rent without in fact including a profit element. Sales J confirmed that the courts should not go through an award with a fine-tooth comb looking for errors. Nonetheless, the arbitrator in this case simply appeared to have made a glaring mistake, which could not be left uncorrected. The judge explained:
In my judgment, the Arbitrator failed to determine and allow for the notional tenant’s profit element, which was on his reasoning a matter essential to his decision on the issue he had to resolve. This failure by the Arbitrator fell within section 68(2)(d), in that it amounted to a “serious irregularity” by virtue of which he failed to deal with the basic issue which he had to decide. It has caused substantial injustice, in that Metropolitan has been deprived of the benefit of a rationally sustainable arbitral award, and the award which has been made is flawed in a manner which may cause Metropolitan substantial financial detriment in having to pay an excessive amount of rent under the lease for a very extended period of time.
Obviously, something must have gone wrong with the arbitrator’s logic or reasoning. Whatever it was, the courts will send a very poor or aberrant award back to the arbitrator for correction, particularly where the error by the arbitrator has real financial consequences.
Example Challenge 3: Dissenting Arbitrator Criticises the Majority
Our final example concerns an award made in an arbitration concerning a gas desulphurisation plant in the UK. The award was the subject of criticism in a recent decision of the Technology and Construction Court, F Ltd v. M Ltd [2009] EWHC 275 (TCC).
Under a consortium agreement, the claimant was responsible for detailed design, procurement, construction and commissioning. The defendant’s scope under that agreement included process design and supply of equipment. The project did not proceed smoothly, and after a dispute, the claimant and defendant (the consortium partners) entered into two agreements with the employer. Under the first agreement, the contract price was reduced by around £2 million because of a technical problem with certain pumps. The second agreement was in full and final settlement of all claims by the consortium against the employer in return for the employer paying the consortium a total of £7 million. Of that, £5 million went to the claimant, and the remaining £2 million to the defendant.
The claimant then brought ICC arbitration proceedings against the defendant, seeking to hold the defendant liable for the reduction in the contract price of £2 million and claiming other losses it suffered due to the settlement with the employer. The arbitral tribunal found, by a majority, that the claimant was entitled to receive £1.8 million from the defendant, but that the defendant should be paid £1.1 million by the claimant (so a net payment to the claimant of £0.7 million). The claimant also recovered close to half of its legal costs.
One of the arbitrators had a difficulty with this decision and wrote a dissenting opinion. The majority had, essentially, allowed a credit in favour of the defendant while at the same time dismissing the defendant’s assertion that the claimant was responsible for delay caused by design responsibilities. The points on which the tribunal had allowed this credit against the claimant seemed to be of the tribunal’s own devising rather than arguments the defendant had made. The claimant alleged a serious irregularity under Section 68 and relied on the minority award.
HHJ Coulson QC held that the mere existence of a minority, or dissenting, opinion was irrelevant for the purpose of Section 68 -- irrespective of whether the dissent was based on an issue of fact or a point of law. Provided that the point in question had been addressed by the parties in argument, an arbitral tribunal was free to decide by a majority if unanimity could not be reached. If, however, a dissenting arbitrator raises a point as having been decided by the majority without any reference to the parties, that might be relevant although such a dissent would not amount to a serious irregularity causing substantial injustice (all of which is required for a challenge to succeed) without more. Depending on the circumstances, the dissenting arbitrator’s comments might, however, be given considerable weight by a judge.
On the facts, the judge allowed the challenge. He could see no basis that had been argued before the tribunal that would support the credit allowed against the claimant. The analysis adopted by the tribunal had been novel and should have been put to the parties (and their experts and advisers) for comment. The award was sent back to the tribunal for further consideration.
Conclusion
English courts, in line with the principles under the UNCITRAL Model Law, support arbitration and will be slow to uphold challenges to awards, whether legal or procedural in nature. But that does not mean entering the arbitral arena exposes parties to the whims of a tribunal -- assuming for the moment the parties somehow ended up with the worst possible arbitrator. The High Court’s supervisory jurisdiction under the Arbitration Act 1996 ensures that the risk of serious arbitral miscarriages of justice is contained. Employing experienced arbitration lawyers to assist with appointing the tribunal and putting in place the procedure further helps to prevent an unsatisfactory award (always distinct from an unsatisfactory result). The examples of challenges that have succeeded in the High Court that we have looked at do suggest, however, that certain arbitrators ought to up their game, as all the errors made (ignoring your own logic, deciding the case on a basis not argued or relying on fashionable transnational law) are, on one view, avoidable.
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For more information about the issues covered in this report, please contact Marcus Esly in our London office at 44-20-7936-5356 or at EslyM@howrey.com or contact your Howrey attorney. For more information about Howrey's Construction Practice Group, click here.
ENDNOTES
| 1/ | Oddly, it was common ground between the parties that the law applicable to the arbitration agreement was unclear. Very often, that will be the same as the law of the seat of the arbitration because it is sensible to conclude that if parties wanted their arbitration to take place in a certain jurisdiction, the law of that jurisdiction should also govern the arbitration agreement. However, based on the concession made by the parties, the court approached the issue by applying the law of the place where the award was made (Paris), the fall-back set out in Section 103(2)(b) of the Arbitration Act 1996.
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©2009 Howrey LLP
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