UK: Challenging An Arbitration Decision: Serious Irregularity

Last Updated: 7 May 2015
Article by Jeremy Glover

It would be fair to say that a party wishing to challenge an arbitration award, under the 1996 Arbitration Act, in England and Wales will as a general rule face an uphill struggle. Even where challenges are made, the courts tend to uphold the original award. This makes the recent decision of Mr Justice Akenhead in the case of The Secretary of State for the Home Department and Raytheon Systems Limited1 all the more interesting.

Mr Justice Akenhead had to consider a challenge to an award on the grounds that there had been a serious irregularity under section 68(2) (d) of the 1996 Arbitration Act. As the Judge noted, there was:

"no previous authority which substantially mirrors the facts of the current case and, indeed, there are relatively few reported decisions on Section 68(2) (d)".

Section 68(2) of the 1996 Arbitration Act provides that:

"(1) A party to arbitral proceedings may (upon notice to the other parties and to the tribunal) apply to the court challenging an award in the proceedings on the grounds of serious irregularity affecting the tribunal, the proceedings or the award ...

(2) Serious irregularity means an irregularity of one or more of the following kinds which the court considers has caused or will cause substantial injustice to the applicant ...

(d) failure by the tribunal to deal with all the issues that were put to it;

(3) If there is shown to be serious irregularity affecting the tribunal, the proceedings or the award, the court may —

(a) remit the award to the tribunal, in whole or in part, for reconsideration,

(b) set the award aside in whole or in part, or

(c) declare the award to be of no effect, in whole or in part.

The court shall not exercise its power to set aside or to declare an award to be of no effect, in whole or in part, unless it is satisfied that it would be inappropriate to remit the matters in question to the tribunal for reconsideration."

To succeed under section 68, an applicant must prove that there is:

  1. a "serious irregularity"; and
  2. that the serious irregularity caused substantial injustice to the applicant.

The dispute itself related to an eBorders contract (or technology system, in order to reform UK border controls by putting in place an electronic system to vet travellers leaving and entering Britain by checking their details against police, security and immigration watchlists). That contract had been terminated by the Home Office in July 2010. The case in question was a substantial international arbitration, with large legal teams. There had been a 42-day hearing which took place over six months. If the challenge succeeded, the resulting need to rerun such an arbitration would be a significant undertaking.

The tribunal decided that the Home Office had unlawfully terminated and thereby repudiated the contract and awarded Raytheon damages which included £126,013,801 for a claim known as claim A4 – Transfer of Assets. Other sums awarded amounted to £59,581,658 plus interest.

In short, it was the Home Office's case that there had been "serious irregularity" on the part of the tribunal in failing to deal with all the issues that were put to it, in particular important parts of its case on liability and quantum with regard to claim A4. Instead the tribunal had only addressed whether there was breach by the Home Office of a condition precedent in the termination clause. The Home Office also said that the tribunal had ignored its case on the value of assets transferred after termination as well as certain quantum issues.

Mr Justice Akenhead noted that section 68 reflected the:

"internationally accepted view that the Court should be able to correct serious failures to comply with the 'due process' of arbitral proceedings".

He accepted that the threshold test for "serious irregularity" was a high one. The requirement that the serious irregularity has caused or will cause substantial injustice to the applicant was there to eliminate technical challenges. In the view of the Judge, section 68 should not be used to get around restrictions on appeals of law or fact. As noted at the start of this article, the courts will try and uphold arbitral awards where they can.

The Judge made clear that what the court needs to do in deciding whether to remit or set aside is to:

"consider all the circumstances and background facts relating to the dispute, the award, the arbitrators and the overall desirability of remission and setting aside, as well as the ramifications, both in terms of costs, time and justice, of doing either ".

Therefore what is required is a

"pragmatic consideration of all the circumstances and relevant facts to determine what it is best to do but it necessarily covers the interests of justice as between the parties".

It is important to note that if it is the case that the arbitrators have misdirected themselves on the facts, that does not amount to a failure to deal with an issue. However, that was not what was being argued by the Home Office here. First of all, the Judge held that the tribunal had not addressed whether or not all or substantially all of the delay was the actual fault or responsibility of Raytheon. Further, Mr Justice Akenhead was of the view that:

"if the tribunal had considered the issue in such terms, there is a real chance that it would have to reconsider some of its key findings".

This was important, for to succeed with such an application the applicant must show that its position on that issue was "reasonably arguable" and further that had the tribunal found in his favour, it might well have reached a different outcome in the award. The way that this was addressed by the court can be seen with the quantum claim. Here, Mr Justice Akenhead considered that the Home Office had clearly raised with the Tribunal that when calculating quantum relating to unjust enrichment, due account should be taken of the extent to which the costs incurred related to any delay, disruption and inefficiency which was the fault of Raytheon. The tribunal apparently failed to do this. The result of overlooking this "important issue" was that an award in the sum of £126 million was made against the Home Office.

These two issues were described as being "important and indeed critical". There had been a serious irregularity and the Home Office's application was made out. The Judge then had to consider what steps to take. Should the award be remitted or sent back to the original tribunal? The Judge noted that a court needs to consider all the circumstances relating to the dispute, the award, and the arbitrators themselves. What were the effects in terms of time and costs? What were the interests of justice as between the parties? Further, whilst the Judge noted that this was not a point based on prior authority, he did consider that the relative importance or seriousness of the established irregularities was a factor to be taken into account on the decision to set aside. The more serious the irregularity the more likely it is that setting aside may be appropriate.

The key question for the Judge was this:

"one needs to consider whether there is a real risk, judged objectively, that even a competent and respectable arbitral tribunal, whose acts or omissions have been held to amount to serious irregularity causing substantial injustice may sub-consciously be tempted to achieve the same result as before".

Taking everything into account, the Judge formed the view that this was a case where the award should be set aside in total and the matter resolved by a different arbitral tribunal. His reasons could be split into two parts:

(i) The nature of the irregularity and its effect on the tribunal:
  • Both grounds were towards the more serious end of the spectrum of seriousness in terms of irregularity.
  • The fact that the tribunal took some 16 months after final oral submissions to produce their award might lead a fairminded and informed observer to wonder (rightly or wrongly) at least whether (subconsciously) the tribunal was seeking some sort of shortcut.
  • It would be difficult for the tribunal to be required to set aside all its previous ideas. Therefore: "If, albeit conscientiously and competently, the tribunal in effect reached exactly the same conclusions as before, that might well lead to a strong belief objectively that justice had not been or not been seen to have been done."
(ii) It would not be necessary to rehear many of the issues decided in the first arbitration, and if these issues were reopened, the party doing so would do so at the risk of sanction on costs:
  • Much of the arbitration would not have to be reopened. On many of the individual issues on which each party lost, the Judge anticipated that the losing party would not seek to re-argue them. This would be because of the potential for a costs sanction. If a party which lost on a given factual or legal issue before the current tribunal argued it again and lost, the Judge made it clear that he would not be surprised if that led to an indemnity cost sanction, whatever the overall result.
  • Further, much of the factual evidence, adduced before the current tribunal, would be redeployed before the new tribunal and, if anything, it could be rationalised to reflect concessions made by witnesses in cross-examination before the current tribunal.
  • The experts, who are likely to have produced joint statements, were, in the view of the Judge, unlikely to change their views materially.

All of which meant that there would be no need for another 42-day hearing. Therefore, although most decisions are remitted to the original tribunal, here the Judge ordered that the dispute be referred back to a different tribunal.

Postscript

The Judge also granted permission to appeal, and we will keep an eye on whether there is any news of an appeal.

Footnotes

1 [2015] EWHC 311 (TCC) and [2014] EWHC 4375 (TCC).

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