UK: Shot Down: A Major Arbitration Award Defeated (For Now?)

It is not often that a commercial arbitration gives rise to a big news story and becomes a political hot potato. For that reason alone, the two judgments which have been made to date in Secretary of State for the Home Office v Raytheon Systems Limited [2014] EWHC 4375 (TCC) and [2015] EWHC 311 (TCC) would make for interesting reading. But the case is also unusual in other ways. 

Raytheon (best known as a manufacturer of missiles, though in this case supplying an IT system) obtained a nine-figure arbitration award against the British Government after a long, expensive arbitration process, only to then have the award completely set aside by the court, with the case now required to be reheard by an entirely new tribunal, unless Raytheon succeeds in its appeal.

Section 68(2)(d)

It is fundamental that parties should be free to agree how their disputes are resolved "subject only to such safeguards as are necessary in the public interest" (Section 1(b) of the Arbitration Act 1996). One such "safeguard" is the right of a party to challenge an award on the grounds of "serious irregularity affecting the tribunal, the proceedings or the award ...". So far as relevant, section 68 provides:

"68 Challenging the award: serious irregularity.

(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 ground 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 -"

There follows a list of categories of serious irregularity. These are not just examples of serious irregularity. To succeed in a challenge under section 68 the case must actually fit within one of the listed categories. The relevant category in the Raytheon case was:

"(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.

(4) The leave of the court is required for any appeal from a decision of the court under this section."

In the first of the Raytheon judgments, the law and practice in relation to section 68 was summarised as follows (references to authorities omitted):

"(a) Section 68 reflects "the internationally accepted view that the Court should be able to correct serious failures to comply with the "due process" of arbitral proceedings: cf art 34 of the Model Law." ...; relief under Section 68 will be appropriate only where the tribunal has gone so wrong in the conduct of the arbitration that "justice calls out for it to be corrected" ...

(b) The test will not be applied by reference to what would have happened if the matter had been litigated ...

(c) The serious irregularity requirement sets a "high threshold" and the requirement that the serious irregularity has caused or will cause substantial injustice to the applicant is designed to eliminate technical and unmeritorious challenges ...

(d) The focus of the enquiry under Section 68 is due process and not the correctness of the Tribunal's decision ...

(e) Section 68 should not be used to circumvent the prohibition or limitations on appeals on law or of appeals on points of fact ...

(f) Whilst arbitrators should deal at least concisely with all essential issues ..., courts should strive to uphold arbitration awards ... and should not approach awards with a meticulous legal eye endeavouring to pick holes, inconsistencies and faults on awards with the objective of upsetting or frustrating the process of arbitration".

...

(h) In relation to the requirement for substantial injustice to have arisen, this is to eliminate technical and unmeritorious challenges ... It is inherently likely that substantial injustice would have occurred if the tribunal has failed to deal with essential issues ...

(i) For the purposes of meeting the "substantial injustice" test, an applicant need not show that it would have succeeded on the issue with which the tribunal failed to deal or that the tribunal would have reached a conclusion favourable to him; it necessary only for him to show that (i) his position was "reasonably arguable", and (ii) had the tribunal found in his favour, the tribunal might well have reached a different conclusion in its award ...

[j] The substantial injustice requirement will not be met in the event that, even if the applicant had succeeded on the issue with which the tribunal failed to deal, the Court is satisfied that the result of the arbitration would have been the same by reason of other of the tribunal's findings not the subject of the challenge.

A useful summary of the law and practice with respect to Section 68(2)(d) specifically also appears in the first Raytheon judgment (references to authorities omitted):

"(i) There must be a "failure by the tribunal to deal" with all of the "issues" that were "put" to it.

(ii) There is a distinction to be drawn between "issues" on the one hand and "arguments", "points", "lines of reasoning" or "steps" in an argument, although it can be difficult to decide quite where the line demarking issues from arguments falls. However, the authorities demonstrate a consistent concern that this question is approached so as to maintain a "high threshold" that has been said to be required for establishing a serious irregularity.

(iii) While there is no expressed statutory requirement that the Section 68(2)(d) issue must be "essential", "key" or "crucial", a matter will constitute an "issue" where the whole of the applicant's claim could have depended upon how it was resolved, such that "fairness demanded" that the question be dealt with ...

(iv) However, there will be a failure to deal with an "issue" where the determination of that "issue" is essential to the decision reached in the award ... An essential issue arises in this context where the decision cannot be justified as a particular key issue has not been decided which is critical to the result and there has not been a decision on all the issues necessary to resolve the dispute or disputes ...

(v) The issue must have been put to the tribunal as an issue and in the same terms as is complained about in the Section 68(2) application ...

(vi) If the tribunal has dealt with the issue in any way, Section 68(2)(d) is inapplicable and that is the end of the enquiry ... it does not matter for the purposes of Section 68(2)(d) that the tribunal has dealt with it well, badly or indifferently.

(vii) It matters not that the tribunal might have done things differently or expressed its conclusions on the essential issues at greater length ...

(viii) A failure to provide any or any sufficient reasons for the decision is not the same as failing to deal with an issue ... A failure by a tribunal to set out each step by which they reach its conclusion or deal with each point made by a party is not a failure to deal with an issue that was put to it ...

(ix) There is not a failure to deal with an issue where arbitrators have misdirected themselves on the facts or drew from the primary facts unjustified inferences ... The fact that the reasoning is wrong does not as such ground a complaint under Section 68(2)(d) ...

(x) A tribunal does not fail to deal with issues if it does not answer every question that qualifies as an "issue". It can "deal with" an issue where that issue does not arise in view of its decisions on the facts or its legal conclusions. A tribunal may deal with an issue by so deciding a logically anterior point such that the other issue does not arise ... If the tribunal decides all those issues put to it that were essential to be dealt with for the tribunal to come fairly to its decision on the dispute or disputes between the parties, it will have dealt with all the issues ...

(xi) It is up to the tribunal how to structure an award and how to address the essential issues; if the issue does not arise because of the route the tribunal has followed for the purposes of arriving at its conclusion, Section 68(2)(d) will not be engaged. However, if the issue does arise by virtue of the route the Tribunal has followed for the purposes of arriving at its conclusion, Section 68(2)(d) will be engaged.

(xii) Whether there has been a failure by the tribunal to deal with an essential issue involves a matter of a fair, commercial and commonsense reading (as opposed to a hypercritical or excessively syntactical reading) of the award in question in the factual context of what was argued or put to the tribunal by the parties (and where appropriate the evidence) ... The Court can consider the pleadings and the written and oral submissions of the parties to the tribunal in this regard."

The Agreement for the provision of e-Borders

Most people will have heard of the "e-Borders" programme (one could be forgiven for thinking it was properly called "the disastrous e-Borders programme", since this is how it is generally referred to in the media).

The British government wished to collect, store and analyse information on all travellers entering or leaving the UK, whether by air, sea or rail. For this purpose, the Immigration, Asylum and Nationality Act 2006 created powers for the UK Border Agency ("UKBA") and police to require data from carriers in advance of movements into or out of the UK. 

To allow the rapid collection, storage and analysis of information obtained under these powers, a new IT system was needed. In 2007 the then Home Secretary, Jacqui Smith, signed a nine year contract on behalf of the Government (the "Agreement") for such a system to be provided by Raytheon Systems Limited ("Raytheon"). Raytheon is involved in several industries, but is perhaps best known as a manufacturer of missiles. Raytheon was reportedly to be paid around £750 million. 

The Agreement (which remains largely confidential) ran to 218 pages and cross-referenced nearly 60 separate schedules, a "compressed" version of which filled three further volumes. In this article, quotes from and about the Agreement are taken from the first court judgment.

The project was broken down into four stages known as Release Projects: RP1, RP2, RP3 and RP4. Each RP was broken down into five distinct phases numbered ATP1 to ATP5 relating respectively to "design, development, system testing, end-to-end testing and live operational testing" with the successful completion of each stage being termed either a "Milestone" or "Key Milestone". Once a Milestone was achieved, this would trigger a payment to Raytheon. The payments to Raytheon were 'sculpted' so that early in the project it would be paid less than the cost which it incurred in providing the assets and services. Only later would there be any element of profit for Raytheon.

Clause 23.2 provided that Raytheon was to notify the Government "as soon as reasonably practicable" if "the design, development, testing or implementation of the System or the delivery of the Services ... does not conform with the Implementation Plans and may cause Delay to", amongst other things, achieving "any Milestone by its associated Milestone Date".

Clause 23.3 required that, within 10 days of becoming aware of such actual or potential delays, the parties were to "comply with the Remedial Plan Process to rectify any Delay".

The Agreement provided that where a "Delay arises from an event other than a Force Majeure Event, Compensation Event or Relief Event, [Raytheon] shall be responsible for such a Delay". If Raytheon was responsible for a delay, the Agreement provided for "Delay Deductions" (in effect a form of liquidated damages) to be imposed on Raytheon. 

The "Compensation Events" included an "Authority Cause", meaning "any material breach" by the Government. 

Where the Delay was caused by such a "Compensation Event", Raytheon could potentially claim "Compensation". It was, however:

"at least highly arguable that the provisions of Clause 25 provide for conditions precedent which required [Raytheon] to give effective and timely Compensation Notices, failing which it was not to "be entitled to any Compensation or relief in respect of the Compensation Event concerned" (Clause 25.2.5).

Clause 57.3 also required [Raytheon] to give [the Government] an "OS Relief/Compensation Notice" within 10 days of it becoming aware that a Relief Event (such as fire, explosion or strike) or Authority Cause had "adversely affected or [was] likely to adversely affect the ability of [Raytheon] to observe and/or perform its other obligations"; if such a Notice was not provided within the requisite time-frame then [Raytheon] "shall not be entitled to any relief ... in respect of the Authority Causes ..." (Clause 57.3.8)."

Clause 69 set out the various circumstances in which the Government would be entitled to terminate for cause (including failure by Raytheon to meet Milestones) and then concluded: 

In determining whether to exercise any right of termination pursuant to this Clause 69.1.2 [the Government] shall:

(i) act in a reasonable and proportionate manner having regard to such matters as the gravity of any offence and the identity of the person committing it; and

(ii) give all due consideration, where appropriate, to action other than termination of this Agreement."

The underlined text came to be referred to as the "Process Requirements".

Termination by the Government

In July 2009, the Government issued a "Notice of Material Default" alleging that Raytheon was in default in having failed to meet certain Milestones. 

From February 2010 "Reset Negotiations" took place between the parties about the possible restructuring of the Agreement.

In May 2010 there was change of Government. The Labour Government which had signed the Agreement was replaced by a coalition of the Conservatives and Liberal Democrats. The new coalition government established the "Major Project Review Group" ("MPRG") to review major IT contracts. 

It is Raytheon's position that, by the beginning of July 2010 the restructuring of the Agreement had been agreed (at least in principle) and that Raytheon was ready to implement it. 

In July 2010 the MPRG, however, recommended that the Agreement instead be terminated for cause. The new Home Secretary (Theresa May MP) gave notice purporting to terminate the Agreement and, thereafter, retained an alternative service provider. Raytheon's position was that the Government had no right to terminate, and that this purported termination was a repudiation of the Agreement by the Government, which Raytheon accepted.

The Government gave instructions in July 2010 purportedly pursuant to the "Exit Management" provisions of the Agreement, identifying assets which it required Raytheon to transfer. Raytheon agreed to transfer these assets but reserved its position that the Exit Management provisions had no contractual force following the repudiation.

At the time it purported to terminate the Agreement, the Government had paid Raytheon around £259.3 million under the Agreement. It was common ground that this was less than the costs Raytheon had incurred pursuant to the Agreement.

In April 2011 the Government drew some £50 million on letters of credit which had been provided by Raytheon under the Agreement. The Government brought a claim by way of arbitration seeking damages. 

Raytheon counterclaimed, seeking around £500 million. Raytheon's position was that there was no event of Default, that if any Default did occur it was caused by the Government's wrongdoing and that the Government did not act in a reasonable and proportionate manner in deciding whether to terminate and did not give due consideration to action other than termination for cause. Raytheon alleged that the Government had caused the Defaults to arise, including by failures to manage the Programme or to engage and manage the relationship with various other parties. Raytheon alleged that the Government did not consider termination for convenience, conclusion of the Reset negotiations or continuing the Agreement. 

It is not clear what (if any) institutional rules governed the arbitration. Three arbitrators were appointed, none of whom is named in the judgment. The Government nominated an English arbitrator and Raytheon nominated an American arbitrator. The chairman was Canadian. The first judgment refers to:

"... the known experience of at least one of the members of the tribunal in the construction and technology field (and indeed in the TCC)"

Presumably, therefore, at least one of the tribunal was either a former TCC judge or senior QC specialising in TCC work. The arbitration reportedly involved 4,000 pages of pleadings, 60 factual witnesses with 2 or 3 statements per witness, 8 expert witnesses, several procedural hearings, and a final hearing which took 42 working days.

A central issue in the arbitration seems to have been an enquiry as to the Home Secretary's motives for having wished to terminate the Agreement. It is not entirely clear whether the Home Secretary herself gave evidence in the arbitration. If she did then that is a further unusual feature of the case - the office of Home Secretary is one of the four most senior posts in the British government.

On 4 August 2014, more than three years after the commencement of the arbitration, and sixteen months after the hearing, the tribunal handed down a Partial Final Award. The tribunal held that the Government had unlawfully terminated, and thereby repudiated, the Agreement and that Raytheon had accepted that repudiation. The tribunal dismissed the Government's money claims, and awarded Raytheon damages, though one of the arbitrators apparently gave a dissenting opinion on one issue related to quantum. 

It was immediately widely reported in the media that the arbitral tribunal - which the BBC described as a "secret court" - had ordered the Government to pay Raytheon £224 million (Raytheon announced that the Government had also been ordered to pay Raytheon's costs, which were not included in this figure). 

The coalition Government blamed the loss on problems it had inherited from its predecessor. Labour blamed the coalition's decision to terminate, and called for the Government to disclose the legal advice on which it acted, and to reveal how much it had paid the lawyers representing it. The Home Secretary said:

"The situation the Government inherited was ... a mess with no attractive options.

The Government stands by the decision to end the e-Borders contract with Raytheon ...

Key milestones had been missed and parts of the programme were running at least a year late. Raytheon Systems Ltd had been in breach of contract since 2009. Prolonged negotiations had taken place under the previous Government which had led nowhere.

All other alternatives available to the Government would have led to greater costs than the result of this Tribunal ruling. Continuing with the contract and trying to rectify the deep rooted problems was estimated at the time as likely to cost £97 million more than terminating it, even with today's settlement.

Since the Raytheon contract was signed, the Government has improved its approach to procurement and would never enter into such a contract today."

The Chairman of the Home Affairs Select Committee (a labour MP) was quoted as saying:

"Minister after minister and successive heads of the UKBA told the select committee that the government was the innocent party and that Raytheon had failed to deliver. ... It is now clear that the UKBA didn't know what they wanted from the e-Borders programme."

The Government challenged the award under section 68 of the Arbitration Act 1996. The grounds for the challenge are discussed below. 

On 19 December 2014, Akenhead J handed down the first judgment in the Raytheon case.  He upheld the Government's challenge, holding that there had been serious irregularity, and that the substantial injustice had resulted. He left open the question of what the appropriate relief was. 

On 17 February 2015 Akenhead J gave the second judgment in the Raytheon case. He ordered that the award be set aside for resolution by a different tribunal. He also granted Raytheon permission to appeal both judgments under section 68(4) of the Arbitration Act 1996.

'Liability Grounds'

A "Consolidated List of Issues" had been submitted to the tribunal by the parties. The tribunal said that their analysis: was "guided by the Consolidated List of Issues, keeping in mind the parties' recognition that it may not be necessary for the tribunal to determine all of the issues that the parties have identified".

In its Partial Final Award, the arbitral tribunal had refrained from attributing responsibility or fault for the delays which occurred. There was no determination as to how much (if any) of the delay was attributable to Raytheon, how much (if any) to the Government and how much (if any) to some other cause ("Force Majeure" or a "Relief Event").

Instead, the tribunal asked whether - assuming that there had been a relevant Default, and that there was therefore a prima facie right on the part of the Government to terminate - the Government had complied with the Process Requirements.

The tribunal held that the Government had failed to comply with the Process Requirements in four ways, the first being:

"(a) [the Home Secretary] failed to address in any adequate fashion the difficult question of whether and, if so, to what extent [the Government] had caused or contributed to the Defaults on which [the Home Secretary] was relying to terminate the Agreement;"

As to the other three failings, it is not easy, from the description in the judgment, to understand what these were. In summary, they appear to have been that:

(a) the Home Secretary deferred to the MRPG's recommendation;

(b) The Government invoked as among the grounds for termination an alleged failure by Raytheon to comply with the Remedial Plan, in circumstances where the Government had "abused the Remedial Plan Process", had rejected a Remedial Plan proposed by Raytheon and had "unfairly kept Raytheon in a contractual limbo for six months".

(c) The Government had invoked alleged "Service Management failures" as among the grounds for termination of the Agreement. Some of the failures alleged did not occur. The other failures were "bedding in issues", and had taken place long before termination (and presumably been cured).

Since the Government had failed to comply with the Process Requirements, it did not matter who was responsible for the delay. By not following the Process Requirements and by purporting to terminate, the Government was in repudiatory breach of contract which was accepted by Raytheon.

Before the court, the Government argued that in adopting this reasoning, the tribunal had failed to deal with two issues which were put to it, and that the tribunal's failure to deal with these issues had caused the Government substantial injustice. These issues are referred to in the judgement as the "Liability Grounds".

Liability Ground 1 was that the tribunal did not make any determination as to the legal consequences of Raytheon's failure to serve notices, as a result of which failure the Government had contended that any delay necessarily became Raytheon's contractual responsibility. As such, it was irrelevant that the Home Secretary had failed to consider "whether and to what extent [the Government] had caused or contributed to the Defaults on which the Home Secretary was relying" - the Defaults were Raytheon's contractual responsibility.

The court rejected Liability Ground 1. In order for the Process Requirements ever to come into play there must first, necessarily, always be at least some default for which Raytheon was contractually responsible. The fact that Raytheon was contractually responsible for the default could not, therefore, be determinative of whether it was "reasonable and proportionate" to terminate for that Default. The Government had to have regard to whether, even if Raytheon was contractually responsible (by reason of having failed to serve the required notices) the Government was factually responsible. The judge noted that it might be said that this was "wrong as a matter of contractual construction", but held that this was by implication the tribunal's conclusion, and so that the tribunal had dealt with the issue.

Liability Ground 2 was:

"although it is common ground that the Tribunal had to judge the reasonableness and proportionality of the termination for cause pursuant to Clause 69.1.2(i) the tribunal failed to make any assessment of the nature and seriousness of any relevant Default(s) on the part of [Raytheon] which prima facie entitled a termination for cause, in order to consider whether, in light of the same, it was objectively reasonable and proportionate to terminate the Agreement."

The Court accepted Liability Ground 2. There was a concentration on what the Home Secretary did or did not do in relation to the possible responsibility of the Government in fact for the delays but the tribunal did not consider the scenario that Raytheon may have been responsible for all the delay. The tribunal had been critical of the fact that the Home Secretary had made her decision based on submissions which consistently avoided any suggestion that the Government might be to blame for causing or contributing to the delays. But the tribunal never considered whether those advising the Home Secretary were factually justified in telling her this. 

The court concluded:

"I am satisfied that there is substantial injustice here, either because the tribunal did not obviously consider in principle whether there could be or was compliance with the Process Requirements in circumstances in which the entire responsibility for the milestone delay was that of [Raytheon] and/or whether the substantial responsibility for such delay was that of [Raytheon]. The substantial injustice arises not simply from the fact that these issues were not clearly dealt with. They arise in the context that both parties spent a large amount of time, resources and indeed money in presenting their cases and evidence as to responsibility for the delays, disruption and inefficiencies. The fact that these issues were not addressed even in the context of compliance with the Process Requirements might well lead an objective party or informed bystander to consider that the tribunal was simply seeking to avoid getting into the detail. I do not suggest however that, subjectively or consciously, that is what the tribunal was here actually doing."

'Quantum Grounds'

The Government's other section 68 challenges related to quantum. One of Raytheon's claims was in respect of assets it had agreed to transfer to the Government, while reserving its position that the Government had no contractual right to those assets. Raytheon claimed £126,013,801 for these assets, being their cost to Raytheon, and claimed a further 15% profit. The tribunal explained how this had been arrived at:

"714. By calculating the percentage of [Raytheon's] costs incurred on the whole project that had been recovered and applying the unrecovered percentage to the cost of the assets transferred to [the Government]. Thus [Raytheon] maintains that it incurred costs totalling £413,021,490. It has been paid £141,598,315 and has therefore recovered 34.3% of its costs; 65.7% are unrecovered.

715. [A witness] lists the assets included in the Asset Register and the costs allocated to those assets. He identifies the sum of £191,753,736 as attributable to the assets that were ... transferred. As he explains, the assets comprise not merely hardware, software and such like, but "[a]ll of [Raytheon's] cost base (and its subcontractor costs) [that were] involved (directly or indirectly) in the provision of these Assets".

716. On the basis that the cost of the transferred assets is £191,753,736 and [Raytheon] has recovered 34.3% of these costs through payments from Y, the remaining balance, 65.7% of £191,753,736, results in [Raytheon's] claim of £126,013,801.

717. It is therefore apparent that [Raytheon] has not followed the contractual route to arrive at Unrecovered Costs and there is reason to believe that sum claimed would not approximate with the Unrecovered Costs, calculated in accordance with Agreement."

The tribunal went on:

"719. That is not, of course, fatal to [Raytheon's] claim. Since the tribunal has found that [the Government] repudiated the contract, [Raytheon] was released from further performance of its obligations under the Agreement, including the performance of the Exit Management provisions. As recorded above, [Raytheon] reserved its position and therefore in transferring the assets at the request of [the Government], [Raytheon] was conferring a benefit on [the Government]. The entitlement to a remedy arises from the fact that [the Government] purported to exercise a right which it knew (and accepts) would entitle [Raytheon] to additional payment, on the assumption that it had properly terminated the Agreement. However [the Government] also knew that [Raytheon] disputed the termination and that it contended that [the Government] had repudiated the Agreement. Thus, as recorded above, [Raytheon] reserved its position when agreeing to transfer the assets which are the subject of [Raytheon's] Damages Claim A4. In the tribunal's view, in these circumstances, were [the Government] to retain the benefit of the Transferred Assets without payment to [Raytheon], this would give rise to unjust enrichment. Z is accordingly entitled to maintain a claim in unjust enrichment."

The tribunal held, by a majority, that: "on the balance of probabilities [Raytheon's] calculations are broadly correct". The tribunal declined to add the 15% profit uplift, and awarded Raytheon £126,013,801 as damages for the "transferred assets" claim.

The Government claimed that, in doing this, the tribunal had failed to deal with three issues that were put to it (referred to in the judgment as the "Quantum Grounds"):

"1 that the calculation of compensation should follow the method agreed by the parties in accordance with express provisions;

2 that the assessment of compensation should not exceed the amount that would have been recoverable had the agreement been performed according to its terms;

3 that [Raytheon] should not be permitted to recover sums on a global basis without any consideration of its own actual or possible breaches of contract."

In the list of issues, the issue about the evaluation of the transferred assets claim was expressed in broad terms:

"What monetary award (if any) is [Raytheon] entitled to either on the basis of (i) the provisions of the Agreement; or (ii) [the Government's] alleged unjust enrichment, representing the value of the Transferred Assets that were transferred ... at [the Government's] request following termination of the Agreement?"

The court dismissed Ground 1. The tribunal considered that the tribunal had found that by reason of the repudiation by the Government the contractual route did not have to be followed, and Raytheon had instead a claim in unjust enrichment.

Ground 2 was, in essence, that the tribunal had failed to consider an argument that if the services or thing provided by a supplier is something which was to be supplied under a contract price and values for which had been agreed, but the contract for one reason or another is not or is no longer enforceable, then the quantum meruit or reasonable price is often to be determined by reference to what the parties had otherwise agreed. This was relevant because of the 'sculpting' of the contractual prices, with the contractual prices for assets to be supplied early in the project set below cost.

It was held that:

"in effect the arbitrators did address it by saying that it was difficult to determine what was or would have been due under the Agreement and that, rightly or wrongly, it felt obliged to fall back on the cost approach. ... One might say that this was, again, in law or in fact, wrong but that is not a proper basis of challenge under Section 68(2)(d). The fact that some arbitrators might simply have said that Z had not proved its case in this context is not enough for such a challenge."

The Government did, however, succeed on Ground 3. The court held:

"Assuming, as the arbitrators did, that they had to and should go down the cost route of evaluation of the unjust enrichment, which is readily comprehensible as a pragmatic and practical solution, the background, of which the arbitrators were well aware having heard evidence and argument about it over 42 days, was that both [Raytheon] and [the Government] had been arguing that the fault and responsibility for the apparently undoubted delay, disruption and inefficiency in the delivery of the project which had occurred was the other party's. This was not simply an argument about whether or not [Raytheon] had served contractual notices claiming for delay or compensation events; there were substantive issues as to the fault and responsibility for that delay, disruption and inefficiency. At the very least, given the arbitrators' experience and in particular the known experience of at least one of the members of the tribunal in the construction and technology field (and indeed in the TCC), it must have been within their collective horizon of knowledge that [the Government] was arguing that all or at least most of the delay, disruption and inefficiency was the actual fault of [Raytheon] and that, if one was to base an unjust enrichment award on total costs incurred, at least a credible argument might have been that one needed to take out of the evaluation costs attributable to delay, disruption and inefficiency which was the fault of [Raytheon]. Of course, there is virtually nothing in this nearly 300 page award about who was responsible or at fault in respect of the delay, disruption and inefficiency which seems to have occurred, given that it was common ground that key Milestones had not been achieved and by the time of the termination had been substantially delayed.

The issue therefore comes down to whether there was before the arbitrators an issue that in relation to Claim A4 that, if the arbitrators were to go down the cost route approach to evaluate the unjust enrichment said to have occurred as a result of the transfer of the Assets, account should be taken of the extent to which those costs related to any delay, disruption and inefficiency which was the fault or responsibility of [Raytheon]?"

The Judge went on to find that:

"it was or should have been clear to the arbitrators that Claim A4 was being challenged as a "global cost" claim which was said to be unjustified and unsound in effect at least in large part because it assumed, wrongly, that all the problems of delay, disruption and inefficiency were attributable to the Government. I say "wrongly" because there was a mass of evidence from both sides as to the fault and responsibility for the delay, disruption and inefficiency which had occurred up to the date of termination, with both parties blaming the other. That was something which the arbitrators decided either consciously or subconsciously (in relation to this Claim A4) that it was unnecessary to bear in mind.

It follows that the arbitrators overlooked the need to address the issue of Claim A4 being a global claim and therefore to address the fault and responsibility of Raytheon (if any) in relation to the delay, disruption and inefficiencies which it seems to have been common ground had occurred to a significant extent before the termination. They therefore failed to deal with this issue. It was a very important issue, not least because the consequence of the failure has been that some £126 million has been awarded to Raytheon. It almost goes without saying that, necessarily, there has been substantial injustice because the arbitrators have not addressed the key issues as to (a) whether or not there were problems which were the fault and responsibility of Raytheon and (b) if so, what impact that had on the cost recovery claim which formed the basis of the substantial award in relation to Claim A4. This cannot be classified as anything less than substantial injustice because the arbitrators have not applied their minds to the issue at all and any right minded party to arbitration would feel that justice had not been served".

Second judgment

The second judgment concerned the question of whether the award should be remitted, or set aside in whole or in part.

There are relatively few authorities on this issue, many of which pre-date the Arbitration Act 1996.

There is some evidence that the correct approach is to ask:

"whether a reasonable person would no longer have confidence in the present arbitrator's ability to come to a fair and balanced conclusion on the issues if remitted."

This was the test applied by Mance J (as he then was) in Lovell Partnerships (Northern) Ltd v AW Construction plc (1996) 81 BLR 83. In James Moore Earthmoving v Miller Construction Ltd [2001] BLR 322 Clark LJ (as he then was) appeared to favour that approach, albeit that the issue did not need to be finally determined. In Brockton Capital LLP v Atlantic-Pacific Capital Inc [2014] 2 Lloyd's Rep 275 Field J applied effectively the same test. 

In the Raytheon case, Akenhead J concluded that the award should be set aside, and not remitted to the tribunal. His reasons were as follows:

"(a) Both grounds under Section 68(2)(d) were towards the more serious end of the spectrum of seriousness in terms of irregularity. It is not for the Court to speculate why the tribunal felt that it did not need to address the issues concerned. However, the fact that the tribunal took some 16 months after final oral submissions to produce their award might lead a fair minded and informed observer to wonder (rightly or wrongly) at least whether (sub-consciously) the tribunal was seeking some sort of shortcut. ...

(b) Like Mance J on the Lovell case, I can see that it would be "invidious and embarrassing [for the tribunal] to be required to try to free [itself] of all previous ideas and to re-determine the same issues" and that even for a conscientious tribunal seeking to re-determine such issues the exercise could well "create its own undesirable tensions and pressures". Of course, it is not possible to predict what this tribunal would do if matters were remitted to them. If however, 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.

(c) I do not see that it is likely that there will be any significant re-drawing of the issues in the arbitration. Indeed, I would anticipate that, on many of the individual issues on which each party lost, the losing party would not seek to re-argue them; the sanction will be costs so that, if a party which lost on a given factual or legal issue before the current tribunal argues it again and loses it before the new tribunal, it should not be surprised when it faces an indemnity cost sanction, whatever the overall result. ...

(d) I would anticipate that much of the factual and expert evidence, adduced before the current tribunal, would be re-deployed before the new tribunal; if anything, it would be rationalised to reflect concessions made by witnesses in cross-examination before the current tribunal. ... Although, undoubtedly there will be substantial costs in pursuing the arbitration before another tribunal, the "extra over" cost compared with a remission to the current tribunal will be relatively insubstantial in the context of claims and cross claims which run to nine-figure sums. I would very much doubt for instance that there would need to be another hearing running to anything like 42 days ...

(e) I would also very much doubt that the current tribunal, having probably not considered in any detail the evidence relating to the delays on the project and the responsibility for such delays for two years or more (to date), will have any significant recall of that evidence. Given the probability that any re-hearing and re-consideration of the evidence will not happen for some months yet, the eventual time lapse after the giving of the evidence will be closer to 3 years. If, of course, appeals are pursued, depending on the timing of the appeal, that time lapse may edge closer to 4 years delay. ..."

Conclusion

The setting aside of the award can really be traced to the tribunal having declined to make any findings about the causes of the delay, to allocate responsibility for it. It seems possible that there might have been a desire - subconscious or otherwise - to shortcut that process.

Sometimes, of course, there is a legitimate shortcut, which is when there are conditions precedent which the contractor has failed to satisfy (such as service of a notice within a particular time period). As a result the contractor is made contractually responsible for any delay, whatever the cause. It may be possible to deal with the question of whether conditions precedent have been complied with by way of a preliminary issue, avoiding the need for detailed evidence on delay.

A relatively unusual feature of the Raytheon case is that there was an express obligation on the part of the employer to act reasonably and proportionately in deciding whether to exercise any right of termination. This meant that it was not open to the arbitrators simply to say that Raytheon had failed to comply with the conditions precedent, meaning that Raytheon was responsible for the delay, and the Government could terminate based on that delay. The question of who bore (factual) responsibility for the delay, and to what extent, was relevant to the question of whether the Government had acted reasonably/proportionately. 

The case provides a useful illustration of a particular problem associated with this kind of reasonableness/proportionality obligation, in reducing certainty and making it harder to advise as to whether a right to terminate has arisen. Such clauses increase the scope for disputes, and will tend to mean that such disputes require more evidence and will be more complex to resolve.

The case also shows how there may sometimes be a fine line between an award which is vulnerable to a section 68(2)(d) challenge and one which is not. 

None of the issues which the Government later said the tribunal had failed to decide had been set out in those same terms in the agreed list of issues. The listed issue was apparently simply whether termination had been reasonable and proportionate, and, on the face of the award, the tribunal had decided that issue.

Often, an issue will be put to a tribunal which only needs to be considered or decided if the legal relevance of the issue is that contended for by the party which puts it forward. A tribunal might be asked to decide whether something is fit for purpose. The designer says that it is fit for purpose because the designer acted with reasonable care and skill. The tribunal does not need to decide whether the designer acted with reasonable care and skill, because that is, in fact, legally irrelevant to the question of whether the design was fit for purpose.

So, in the Raytheon case, the Government asked the tribunal to determine who was factually responsible for the delay. But there was no need to decide that unless the tribunal had first concluded that the question of who was responsible for the delay was legally relevant: (i) to the question of whether the Government had acted reasonably / proportionately in terminating; and/or (ii) to the assessment of Raytheon's unjust enrichment claim.

Suppose the tribunal in Raytheon had stated expressly in its award its decision on these 'threshold' questions: "we consider that the question of who is factually responsibility for the delay is not relevant to the question of whether the Government acted reasonably / proportionately, and is also not relevant to the assessment of Raytheon's unjust enrichment claim". In that case it would be much harder for the Government to argue that the tribunal had failed to determine the issues that were put to it. 

Sometimes, it will be possible to infer from a tribunal's decision on a given issue, what its decision on an antecedent issue must have been. So, for example, it might have been said that because the tribunal did not make any determination as to responsibility for the delay, and decided that the Government had not acted reasonably or proportionately, the tribunal must necessarily have concluded that responsibility for the delay was of no relevance to the question of reasonableness / proportionality. 

The court in Raytheon considered it obvious, or at least strongly arguable, that delay was of relevance to those questions. Therefore the tribunal cannot have arrived at its conclusion by asking "is delay relevant" and concluding that it was not. Rather, the tribunal must never have addressed its mind to whether delay was relevant. The court's assessment of the strength of the Government's argument informs the court's finding as to whether the tribunal considered the issue. And so, while s68(2)(d) is not an appeal on the merits, a court's view on the merits of the decision can have an indirect effect, where a question arises whether a lacuna in the award is intentional or unintentional.

Of course, the case is the subject of an appeal, and so the position is subject to change. For the moment, the case underlines the uncertainty which can be created when a contract imposes a duty to exercise a termination right reasonably / proportionately. The case illustrates how a successful section 68 challenge may arise, and offers tribunals a stark reminder of the scrutiny to which their awards may be subject.

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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