UK: Court Sets Aside Arbitration Award For Serious Irregularity

Last Updated: 13 February 2015
Article by Jonathan Elvey and Despina Plomaritou

Lorand Shipping Limited v. Davof Trading (Africa) B.V. (Ocean Glory) [2014] EWHC 3521 (Comm)

This case is a rare example of a successful challenge to an arbitration award on the ground of serious irregularity under section 68 of the Arbitration Act 1996 (the "Act").

Section 68 sets out a limited list of irregularities which, taken alone, might allow very wide grounds of challenge. However, the requirement to establish "substantial injustice" in relation to all the grounds imports strict limits to the parties' prospects of successfully challenging awards.

The Commercial Court held that the Tribunal's failure to give notice to the parties that it intended to adopt a course of action that neither party had advocated, and without giving them an opportunity to make submissions on the proposal, constituted a serious irregularity leading to substantial injustice. The Court granted the order sought by the applicant Owners and remitted the award back to the Tribunal for determination of certain disputes.

The background facts

Disputes arose between the parties to a voyage charterparty that provided for the shipment of animal feed from Ivory Coast to Morocco. The vessel lost her rudder and was towed to Morocco but discharge was significantly delayed and the condition of the cargo deteriorated as a result.

Pursuant to the terms of the charterparty, the dispute was governed by English law and was to be referred to London arbitration. There was a time bar clause under which any claims had to be lodged within six months of the completion of discharge.

The arbitration award

Following completion of discharge, the Owners commenced arbitration proceedings against the Charterers. In a rather unclear Claim Submission, the Owners sought an interim award on demurrage and also asked the Tribunal to reserve its jurisdiction over other disputes and claims, including an indemnity from the Charterers in respect of any cargo damage claims that might be brought against the Owners by the cargo receivers.

The Tribunal made a final award, awarding the Owners demurrage. Regarding the other potential claims, the Tribunal declined to reserve its jurisdiction. They based this rejection on:

  1. the length of time that had elapsed since the cargo had been discharged; and
  2. the absence of any evidence that claims would be brought by cargo interests against the Owners.

The effect of the award in the terms issued exhausted the Tribunal's jurisdiction. The Tribunal envisaged that if there were any further claims, then these would be brought in new arbitration proceedings. But, in the circumstances, this was not possible. The effect of the contractual time bar was that the Owners were unable to commence fresh arbitration proceedings against the Charterers. Therefore, the Owners were precluded from pursuing indemnity claims.

It was also plain from the arbitration award that the course adopted by the Tribunal had not been advocated by either party. Further, neither party had been given the opportunity to make written or oral submissions.

Owners' arguments on appeal

The Owners challenged the award for serious irregularity under section 68. They argued that the Tribunal had failed to comply with its mandatory general duty under section 33 of the Act to "act fairly and impartially as between the parties, giving each party a reasonable opportunity of putting his case and dealing with that of his opponent". Rather, the Tribunal had:

  1. relied solely on two considerations (the length of time since the cargo was discharged and the absence of evidence that cargo interests intended to bring claims against the Owners) which had not been raised by either of the parties and which the Tribunal gave the parties no opportunity to address; and
  2. had adopted a course of action that had not been advocated by either party and without giving the parties the opportunity to comment. The Owners had asked the Tribunal to reserve jurisdiction over any other claims arising under the charterparty; the Charterers had asked for those claims to be dismissed on their merits. The Tribunal adopted neither of these courses of action and followed a path of its own devising.

The Owners submitted that the course of action followed by the Tribunal constituted a serious irregularity leading to a substantial injustice under section 68.

The Charterers opposed the Owners' application, arguing that the high threshold of serious irregularity leading to substantial injustice under section 68 had not been met.

The Commercial Court decision

The Commercial Court granted Owners' application. The Judge held that:

  1. despite the lack of clarity of the Claim Submissions, it was relatively plain that indemnity claims had been referred to the Tribunal – or at least that the parties had proceeded on that basis. The fact that (as the Judge put it) no specific claims had been quantified was not fatal;
  2. where a tribunal wishes to adopt a course not advocated by either party, it is generally incumbent upon the Tribunal to give the parties the opportunity to present their views on that particular course before it is finally adopted. The Tribunal's failure to do so amounted to serious irregularity. In this case, the Tribunal adopted a "halfway house" approach that had not been advocated by either party. Where a claim is submitted to a tribunal for determination, the Tribunal is obliged to determine it one way or the other – it has no power to decline to act. This Tribunal should either have reserved jurisdiction over further claims (as the Owners requested), or dismissed those claims on their merits or on other grounds (as the Charterers requested). In this case, the Tribunal adopted neither of those courses of action.
  3. The requirement under section 68 to show "substantial injustice" did not require the Court to be satisfied that the Tribunal would have reached a different view if it had given the parties the opportunity to make submissions – it sufficed that the Tribunal might realistically have done so.

Comment

Although the Ocean Glory application succeeded, the Commercial Court decision and the comments by the Judge reaffirm the very high threshold for applications under section 68 of the Act.

The case also serves as a reminder to arbitrators that they should aim to adopt a course of action advocated by the parties. In the event that they consider there is a more practical approach, then this should be put to the parties to give them a fair opportunity to consider and address it.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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