Arbitration awards are meant to be final and binding. Under the rules of many of the leading arbitral institutions such as the ICC and the LCIA, the parties give up any right to appeal the award on the merits. But parties do retain a right to challenge an award if there has been a violation of due process. Under English law, a due process challenge is governed by Section 68 of the Arbitration Act 1996, which requires the challenging party to prove that there has been a ‘serious irregularity’.
One of the examples of such an irregularity given in the statute is a ‘failure by the tribunal to deal with all the issues put to it’. Unsuccessful parties have latched on to this, challenging awards on the basis that the tribunal forgot to discuss or expressly dismiss one of their arguments or simply preferred the other side’s evidence without explaining why. Some challenges have steered close to asking the court to review the tribunal’s reasoning. In UMS Holding Ltd v Great Station Properties SA [2017] EWHC 2398, the Commercial Court has set out very clear limits, which should discourage attempts to mount appeals on the merits disguised as Section 68 challenges.
A serious irregularity giving rise to substantial injustice under English law
The concept of a serious procedural irregularity was introduced into English law by the Arbitration Act 1996. The 1996 Act brought about a wholesale reform of English arbitration law and was a response to mounting criticism that the courts had shown too willing to interfere in the arbitral process. Setting aside awards is perhaps the most direct example of judicial interference. The Departmental Advisory Committee reported on the new law before it was enacted by Parliament and explained that Section 68 was meant to operate as a “longstop, only available in extreme cases where the tribunal has gone so wrong in its conduct of the arbitration that justice calls out for it to be corrected”. It was only concerned with due process. Ten years after Section 68 was enacted, the House of Lords reminded practitioners of the “radical nature” of the changes that it had introduced (Lesotho Highlands Development Authority v Impregilo SpA [2006] 1 AC 221).
Section 68 states an award may be challenged if there has been a serious irregularity affecting the tribunal, the proceedings or the award. But that is not sufficient by itself: the serious irregularity must also have caused substantial injustice. In Lesotho, the House of Lords explained that the requirement of substantial injustice was “designed to eliminate technical and unmeritorious challenges”. This additional requirement will be satisfied where the party challenging the award can show that the serious irregularity led the tribunal to reach an unfavourable conclusion, and where, had it not been for the irregularity, the tribunal might have come to a different view, provided that such an alternative view was at least reasonably arguable (Vee Networks v Econet Wireless International Limited [2004] EWHC 2909).
‘Failure to deal with an issue put to the tribunal’
Section 68 also sets out an exhaustive list of categories of what can amount to an irregularity, one of which is a ‘failure by the tribunal to deal with all the issues that were put to it’ in Section 68(2)(d)). At first blush, this may seem to be concerned with a situation where the arbitrators have forgotten to decide a particular claim. For example, if the respondent alleges that the claimant’s damages (if any) have to be halved because of the claimant’s contributory negligence, then that would plainly be an ‘issue’. If the tribunal awarded the claimant damages of £100 without deciding the contributory negligence point, it would have failed to deal with an issue that the respondent put to it. Where the tribunal has not dealt with an issue at all, that is likely to cause substantial injustice, as the Court of Appeal noted in Checkpoint Ltd v Strathclyde Pension Fund [2003] EWCA Civ 84.
The question is, however, whether Section 68(2)(d) was meant to be wider than that. Suppose the arbitrators had turned their mind to the contributory negligence point, overlooked the respondent’s witness statement dealing with this entirely, and then dismissed the point stating that there was no evidence in support of the respondent’s contention. Have they failed to ‘deal with an issue’? They have decided the issue, that there was no contributory negligence, but they have done so without considering the material that had been ‘put to them’. Does a serious irregularity include a failure to consider certain evidence, or give sufficient weight to it?
Another example of a serious irregularity in Section 68(2) is where the tribunal fails to deal with its overriding duty (found in Section 33 of the Arbitration Act 1996) 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.” Some challenges have sought to draw a link between the duty to act fairly and impartially and a requirement to deal with all the issues put to a tribunal: the argument is that if a tribunal simply adopts all the evidence in support of one party’s case, without explaining why or making reference to the other party’s evidence, then the tribunal has not acted fairly or impartially.
Can the tribunal’s evaluation of the evidence be a ‘failure to deal with an issue’?
The scope of Section 68(2)(d) has been considered by the English courts in a series of decisions leading up to UMS Holding. In one of the earlier cases on this issue, World Trade Corporation v Czarnikow Sugar [2005] 1 Lloyd's Reports 422, the Court found that how the tribunal perceived a piece of evidence, or what weight they might accord to it (some, or even none at all), was not an “issue” for the purposes of Section 68(2)(d).
However, subsequent decisions then left the door open, if only slightly. In Arduina v Celtic Resources Holdings PLC [2006] EWHC 3155, Toulson J commented that:
“The assertion that the arbitrator failed to take any or proper account of the evidence could, in an exceptional case, give rise to a challenge under section 68, based on the general duty of an arbitrator under section 33 if, for example, an arbitrator genuinely overlooked evidence that really mattered, or got the wrong end of the stick in misunderstanding it. But there is all the difference in the world between such cases and an arbitrator evaluating evidence but reaching factual conclusions on it (as will happen in most arbitrations) which one party does not like. That cannot be the basis of a complaint under section 68.”
The notion that there could be an exceptional case where the tribunal’s approach to dealing with the evidence amounted to a serious irregularity was revisited five years later by Akenhead J in Schwebel v Schwebel [2011] 2 AER (Comm) 1048. He stressed that arbitrators did not have to address each and every argument or piece of evidence in their awards. In cases that depended on factual findings, tribunals should identify the ‘primary’ evidence that they found decisive, as this would have to be part of the reasoning. Only in a ‘rare and exceptional case’ would the court intervene because an arbitrator had made a wrong finding of fact, should have given greater weight to particular evidence or should have explained why no importance was attached to some evidence.
The ‘rare and exceptional’ case
The challenges in Arduina and Schwebel were dismissed. The Court found that the claimants in both cases had been engaged in impermissible attacks on the merits. Others were, however, undeterred. The law reports suggest that parties who have been unsuccessful in arbitrations are fairly quick to assert that theirs is precisely the kind of rare and exceptional case that Toulson J and Akenhead J felt they could not rule out. Section 68 challenges take up a significant amount of the Commercial Court’s time, and all the cases say that the Court should be slow to uphold challenges. The view that a failure to consider evidence could ever be a serious irregularity is not shared by all the judges. Judicial debate continued in the years leading up to UMS Holding. In Petrochemical Industries v Dow Chemical [2012] 2 Lloyd’s Reports 691, Andrew Smith J took the view that awards could not be challenged on the basis that the tribunal overlooked some evidence, but ultimately felt that he was in the minority, since the two previous decisions had left open the possibility of an exceptional set of circumstances that would satisfy Section 68(2)(d).
Flaux J was next to comment. In Sonatrach v Statoil [2014] 2 Lloyd’s Reports 252, he noted that whether there could ever be an exceptional case had not, in fact, been decided as previous comments were obiter and thus not binding on him. The Judge’s concern was that the court could not assess whether a tribunal had accorded the ‘correct’ weight to a piece of evidence, or whether it had genuinely overlooked a piece of evidence or instead simply not referred to it because it was thought irrelevant, without reviewing or second-guessing the tribunal’s evaluation of the material before it. That was not permissible under Section 68. Flaux J stated that the prohibition on attacking a tribunal’s findings of fact applied under all the subsections of Section 68, but he did add that a tribunal might have breached the general duty of fairness under Section 33 where an agreed or admitted piece of evidence was ignored or overlooked.
While the door was perhaps slowly closing, Section 68 challenges seeking to rely on a failure to consider all the evidence kept coming. To give just one further example, in Secretary of State for the Home Department v Raytheon Systems Limited [2014] EWHC 4375 (TCC), Akenhead J confirmed that provided the tribunal had ‘dealt with’ an issue, that would be the end of it. It did not matter whether the tribunal had dealt with it well, badly or indifferently. But no other decision settled whether there could ever be an exceptional case of a tribunal somehow failing to consider or properly evaluate the evidence that would bring Section 68(2)(d) into play.
UMS Holding
That was the position when Teare J had to decide the Section 68 challenge in UMS Holding. By an award of 9 May 2006, an arbitral tribunal had ordered the respondents in the arbitration to pay damages of US$ 305 million, for breach of a joint venture agreement (US$ 55 million) and in relation to a put option (US$ 250 million). The claimants in the arbitration had alleged that the respondents had set up an illicit scheme to divert business and profits away from a Ukrainian business manufacturing gas compressors, which the claimants and respondents had owned through their joint venture agreement. The claimants also argued that they had a right to sell their shares in certain joint venture entities through a put option, thus requiring the respondents to buy them out at a substantial cost. Behind the various companies involved on the opposing sides in the arbitrations stood two individuals, Mr. Lukyanenko and Mr. Grigorishin.
A two week hearing before a tribunal of three eminent arbitrators took place in September 2015. In the Commercial Court, the solicitors for the respondents noted that there were tens of thousands of pages of documents in the hearing bundles. When the Award came, Mr. Grigorishin’s legal team were evidently dissatisfied with it. They commenced Commercial Court proceedings to challenge it less than a month later. The respondents produced over 100 pages of submissions and evidence in support, raising a multitude of irregularities. One key ground on which the award was challenged was that the tribunal had simply made no reference to Mr. Grigorishin’s many witnesses (other than himself), or any of his experts - not even by name, let alone offering any comment on the quality or credibility of any of their witnesses, and did not refer to any of the documentary evidence to which these witnesses (including the experts) had referred or relied. The tribunal had just adopted the claimant’s position on a wholesale basis.
In the Commercial Court, Counsel for the respondent recognised that a mere failure by the tribunal to refer to evidence which was not accepted could not ordinarily amount to a serious irregularity. He submitted that this was an exceptional case, and that the tribunal’s one-sided acceptance of the claimants’ evidence meant that the arbitrators had failed to act fairly or impartially.
Teare J took the opportunity to summarise the principles that the Court will have in mind when considering a Section 68 challenge. He emphasised that the tribunal’s duty is to decide the essential issues put to it, and give reasons for the decision. But those reasons do not have to respond to each and every point that the parties made, or cite every piece of evidence. The evaluation or assessment of the evidence is entirely for the tribunal. The Court cannot speculate or second-guess the arbitrators. There could be many reasons why a particular witness statement or expert report is not referred to in an award. The Court will not speculate in that regard, and will not infer that because the tribunal has not mentioned certain evidence, it must have overlooked this (allegedly important) item. Section 68 was concerned with due process, not with whether the tribunal’s decision was right or wrong. He added that:
“The suggestion that it is a serious irregularity to fail to deal with certain evidence ignores that principle. By choosing to resolve disputes by arbitration the parties clothe the tribunal with jurisdiction to make a “wrong” finding of fact.”
It followed that even if the Court were able to conclude that the tribunal had overlooked or misunderstood evidence, that could only lead to the conclusion that the decision was ‘wrong’ on the facts. As the tribunal is free to make any such error, the challenge would fail even if the Court had the power to review the tribunal’s assessment of the evidence.
The respondents also raised a number of other points.One concerned the way in which the Court should ‘read’ the award. Even before the Arbitration Act 1996, the English courts had made it clear that arbitration awards were not easily to be overturned. In a well-known passage, Bingham J (as he then was) said that (Zermalt Holdings v Nu-Life Upholstery Repairs (1985)):
“… 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.”
Bingham J had said this in relation to a rent review arbitration relating to a convenience store, which had been conducted by surveyors.The respondents in UMS Holding submitted that Teare J should approach the award with less deference. This had been a very complex commercial dispute. Apparently, the parties had spent almost £13 million between them on legal fees. The tribunal consisted of three experienced commercial lawyers, including a retired Commercial Court judge. Counsel for the respondents submitted that the parties in this case were entitled to expect a better quality of award, and presumably one which ought to explain in more detail why their evidence had not been accepted. Teare J dismissed this suggestion, finding that the principles in the Arbitration Act 1996 applied equally to all arbitrations subject to it. Bingham J’s famous statement applied to all arbitrators and their awards, whoever they were. There was thus no ‘better quality’ or ‘higher standard’ of award that might only apply in high value cases.
The respondent’s second point was that certain findings and conclusions in the award could simply not be allowed to stand, as they were “manifestly illogical and cannot rationally be sustained”. This argument was advanced in reliance on Metropolitan Property Realizations Limited v Atmore Investments Limited [2008] EWHC 2925 (Ch), in which the Court set aside an award having concluded that it was obviously flawed as a matter of commercial logic. Teare J noted that the real finding in that case was that the arbitrators had in fact failed to decide a crucial issue that needed to be dealt with. Without a determination of that crucial issue, the award was flawed as a matter of logic. That was different, however, from saying that a decision on an issue, which the arbitrators had actually made, was illogical or irrational - which would be another way of criticizing the tribunal’s decision because it is wrong.
Teare J then considered the lengthy list of matters which the respondents relied on as constituting serious irregularities. The Judge found that many of these were in fact criticisms of findings of law, or of fact, by the tribunal, which were outside of the remit of Section 68. The respondents also alleged that they had not been able to deal with a point that the tribunal found persuasive, but which (the respondents said) had only been taken by the claimants in the last round of written closing submissions. Teare J held that the respondents were not deprived of an opportunity to deal with the point. During a hearing, the chairman had stated that the parties could tell the tribunal if they felt they needed to respond to something said in a supposedly final submission. The Judge concluded that:
“The Tribunal thus had no reason to think that the Grigorishin Respondents, ably advised by counsel and solicitors, had not said all that they wished to say in response to the reply submissions of the Claimants. In those circumstances there was no duty upon the Tribunal to ask whether they wished to say anything more about the Claimants’ submissions”.
That places the onus on the legal representatives to spot new points raised late in the day, and to respond or at least ask the tribunal for clarification or further procedural directions. On this basis, it would seem dangerous to let new points go unanswered, hoping that the tribunal will disregard them because they were unpleaded or had not been argued at the hearing. One can have some sympathy with the respondents in this regard. In an adversarial system, at some point a line should be drawn and the parties should be held to the arguments they have made, and which have been explored in accordance with the procedural timetable through legal submissions, evidence (if required) and orally before the tribunal. Important and potentially decisive legal points should not be taken late in the day. In practice, however, this does occur and parties need to be alert.
Having reviewed (and dismissed) all the respondent’s individual challenges, the judge returned to the submission that this was an exceptional case. The respondents had relied on an ‘aggregation’ of the tribunal’s many alleged shortcomings, which they said amounted to a wholesale failure. That approach did not find favour with the judge, as this would encourage ‘grapeshot’ (and the individual allegations were not, in reality, serious irregularities). Counsel for the respondents also alleged that the tribunal had given much less consideration to the respondents’ evidence, and to the challenges that the respondents had raised to the claimants’ evidence, than an English Court would have done. The respondents relied on the recent decision of the Court of Appeal in Harb v HRH Prince Abdul Aziz Bin Fahd Bin Abdul Aziz [2016] EWCA Civ 556, where the standard expected of a judge in that regard was described as follows:
“Our system of civil justice has developed a tradition of delivering judgments that describe the evidence and explain the findings in much greater detail than is to be found in the judgments of most civil law jurisdictions. This requires that a judgment demonstrates that the essential issues that have been raised by the parties have been addressed by the court and how they have been resolved. In a case (such as this) which largely turns on oral evidence and where the credibility of the evidence of a main witness is challenged on a number of grounds, it is necessary for the court to address at least the principal grounds. A failure to do so is likely to undermine the fairness of the trial. The party who has raised the grounds of challenge can have no confidence that the court has considered them at all; and he will have no idea why, despite his grounds of challenge, the evidence has been accepted. That is unfair and is not an acceptable way of deciding cases.”
Teare J noted that the Arbitration Act 1996 imposed no such duty on tribunals. They had to act fairly and impartially under Section 33, but that did not extend to how the award had to be written. The duty to give reasons arises under Section 52(4) of the 1996 Act. That section is not a mandatory provision and can be excluded by agreement between the parties: if the parties so wish, they could allow the tribunal to simply state who won, and how much was due to them. While the Court of Appeal has the (limited) power to review findings of fact made by the trial judge, the High Court has no such power in respect of arbitrations. The whole purpose of the 1996 Act was to constrain the role of the Court to that of necessary support and supervision, but not to review the reasoning. As the DAC Report on the bill that became the Arbitration Act 1996, put it: the test is not what would have happened if the matter had been litigated.
What about the exceptional case?
Teare J did ask whether there could ever be an exceptional case, and thought that the answer was ‘no’ wherever the allegation would require the court to assess the evidence that was before the court so that it could be decided whether the tribunal had, in fact, overlooked it. The Judge did add though that:
“However, it is difficult and perhaps impossible to identify or describe an exceptional case before one encounters it.”
We suspect it will not be overly long before the next disappointed, but well-funded, party comes to the Commercial Court declaring that they have, at long last, encountered the elusive ‘exceptional case’.
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