Challenging arbitral awards – how serious does “serious irregularity” need to be? – Ryan Cable

By Ryan Cable

Senior Associate Ryan Cable revisits several section 68 arbitral award challenges determined during the course of 2019, including some rare instances of successful challenges, in an attempt to gain a sense of what the English Commercial Court presently considers to meet the grounds for challenging an arbitral award on the basis of “serious irregularity”.

Ryan’s article was published in Law360, 9 March 2020, and can be found here.

The most recent report by the English Commercial Court (Commercial Court Users’ Group Meeting Report in March 2018) shows that only a handful of the approximately one hundred challenges of arbitral awards for “serious irregularity” launched in the past five years have been successful. As we enter 2020, it is worth revisiting some of the challenges determined during the course of 2019 in an attempt to gain a sense of what the English Commercial Court presently considers to meet the grounds for challenging an arbitral award on the basis of “serious irregularity”.

Under the (English) Arbitration Act 1996 (“the Act“), there are three limited grounds on which to challenge an arbitration award in the Courts:

1. Section 67 – the tribunal lacked substantive jurisdiction.
2. Section 68 – serious irregularity occurred during the course of the arbitration.
3. Section 69 – an appeal on a point of law.

In international commercial arbitration, particularly where the arbitration is conducted under the LCIA Rules or the ICC Rules which, unless the parties agree otherwise, waive the right of parties to appeal a point of law, appeals on the ground of serious irregularity regularly arise.

Notwithstanding that a challenge pursuant to section 68 is the most common, a high threshold applies. Accordingly, and as the Commercial Court report shows, an unsuccessful section 68 challenge is a more likely outcome than a successful one. The applicant must establish two things: (i) serious irregularity occurred relating to the tribunal, the proceedings or the award; and (ii) the serious irregularity has caused or will cause substantial injustice to the applicant.

1. “Serious irregularity”

The first requirement is to establish that there is a “serious irregularity” which falls within one (or more) of the nine categories set out at section 68(2) of the Act. These nine categories include that the tribunal exceeded its powers, the tribunal failed to deal with all the issues that were put to it by the parties, uncertainty or ambiguity exists as to the effect of the award or there has been irregularity in the conduct of the proceedings or in the award.

2.  “Substantial injustice”

The second requirement that the serious irregularity has caused or will cause substantial injustice to the applicant can require (if for instance the applicant claims that the tribunal failed to deal with all the issues that were put to it as provided for at section 68(2)(d)) the applicant to demonstrate that the issue(s) not considered by the tribunal were reasonably arguable and that a different conclusion may have been reached in the award if the tribunal had found in its favour in connection with the issue which it failed to deal with. This second requirement, therefore, is open to the Court’s discretion.

Recent examples of successful and unsuccessful section 68 challenge

For the avoidance of doubt, the below examples provide two successful and two unsuccessful challenges, however, as stated above, the statistically more likely outcome is that challenges under section 68 of the Act are unsuccessful.

BSG Resources Ltd v Vale SA [2019] EWHC 3347 (Comm)

Starting with the most recent case and (statistically) more common outcome of an unsuccessful challenge, in BSG Resources Ltd v Vale SA, Sir Michael Burton dismissed an application (which also included an application under section 24 of the Act to remove an arbitrator) that an LCIA tribunal’s decision to not admit into evidence the entire transcript of the final hearing of a parallel investment treaty arbitration conducted under the ICSID Rules was serious irregularity.

Justice Burton held that the three-member tribunal had not shown apparent bias or committed a serious procedural irregularity when it did not admit the transcript on to the evidence record as doing so would have had the effect of re-opening and delaying the LCIA arbitration and it was therefore within the tribunal’s discretion as to whether to admit additional evidence and re-open a hearing. It was also held that even if there had been any serious irregularity, the appeal would not have satisfied the second element of substantial injustice because, in the particular circumstances of the case there was no likelihood of a different outcome had the ICSID transcript been allowed on to the record.

ZCCM Investments Holdings PLC v Kansanshi Holdings PLC & Anor [2019] EWHC 1285 (Comm)

In this further example from 2019 of an unsuccessful challenge under section 68 of the Act, the English Commercial Court rejected an application in connection with an arbitration conducted under the UNCITRAL Rules on the grounds that the tribunal’s decision did not qualify as an award and therefore was not open to challenge under section 68 the Act. The Court held that the tribunal’s decision, which related to denying the claimant-applicant permission to pursue a derivative claim because it did not have a realistic prospect of success, was not an award but rather a ruling which was procedural in substance and therefore analogous to a procedural order which did not decide an issue of substance in relation to the claim.

The Court provided an outline of the factors relevant to determining whether a ruling is a procedural order or an award which included whether the decision finally disposes of the arbitration or a particular issue or claim, the substance of the decision has more weight than its form and regard is to be had to the context in which the ruling was made which may include whether the tribunal intended for the ruling to be an award.

In any event, Justice Cockerill held (at [113]) that even if the ruling had been deemed to be an award, the challenge would not have been successful as there was “no failure to deal with the case as put; nor are the authorities as to inferences from inadequate reasoning apt. The reasoning is robust; the expression of that reasoning is just not very user friendly.”

This example provides a helpful clarification concerning the important distinction between an award and a procedural order which, as this case shows, can prove to be an insurmountable first hurdle in any challenge under section 68 of the Act.

P v D and ors [2019] EWHC 1277 (Comm)

In this successful challenge, the claimant-applicant claimed under section 68(2)(a) of the Act that the arbitrators acted in breach of their 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” because there had been no cross-examination by the respondent-defendant concerning an alleged oral variation of the relevant agreement leading to estoppel and yet the arbitrators found that there was no such agreement or estoppel.

Justice Burton held that the tribunal’s finding in the award had been based on a finding of fact on a core issue which had not been put to a witness in cross-examination and fairness required that the applicant-claimant be given a fair opportunity to deal with the allegation that he was not being truthful. In arriving at its conclusion, the Court held that the Tribunal had not directed at any time that either the rule in Article 4.8 of the IBA Rules (i.e., not requesting the attendance of a witness does not mean that a party has agreed to the correctness of the content of that witness statement) would not apply and/or the rule in Browne v Dunn [1894] 6 R 57 (i.e., that if a party challenges the truthfulness of the evidence of a witness, the witness must be given the opportunity to respond to that allegation in cross examination).

This successful challenge should be viewed with caution as it is possible that a different judge may have given more consideration to the usual course of affairs in international commercial arbitration and placed more emphasis on the IBA Rules instead of assessing the tribunal’s actions through a lens of domestic procedural and evidentiary standards (as seen in the application of the rule in Browne v Dunn).

K v P [2019] EWHC 589 (Comm)

The fourth and final example of a challenge in 2019 under section 68 of the Act is that of K v P which involved several grounds for challenging an LCIA award under section 68 of the Act, not all of which were successful. Due to its mixed success, this case provides a helpful consolidated case example of the Court’s approach to what amounts to “serious irregularity” under section 68 of the Act.

The claimant-applicant was unsuccessful in arguing that the tribunal’s decision to permit the respondent rely on a new submission in their closing submissions which had not been raised in their written submissions but was raised in cross-examination. Justice Cooke held that as the claimant-applicant had not objected to the new submissions at any stage during the hearing (and indeed engaged with the argument in their closing written submissions) and as such had been given every opportunity to respond and therefore no serious irregularity was found.

The Court, however, did not reject the challenge concerning the tribunal’s acceptance of a new point contained in the respondent’s written closing submissions which were simultaneously exchanged. The Court held that the claimant-applicant did not have an opportunity to counter this new argument or to adduce expert evidence in response to the new issue and found (at [47]) that “the Tribunal in accepting this argument without any reference to the [claimant], acted unfairly and deprived them of the opportunity of meeting that case and of putting its own case.”

With regard to the claim that the tribunal failed to deal with issues, this was of mixed success, with the Court declining to find serious irregularity with respect to the tribunal’s assessment of a particular international accounting standard when assessing the financial treatment of particular assets. The Court did, however, find (at [52]) that the tribunal had failed to deal with issues arising from warranties and indemnities such that “there was a serious irregularity which has caused substantial injustice because of the possibility of the Tribunal coming to a different conclusion in the absence of such unfairness and failure to deal with the issue”. This issue was remitted to the tribunal for determination.

The final (and successful) point raised in this challenge was that the tribunal had arrived at a conclusion contrary to the agreement position between the parties “and was reached without giving any notice to the parties so that the [claimant] had no opportunity of meeting.” The Court held (at [53]) that at no point in time did the tribunal receive submissions from either party on a point which the tribunal decided in its award to be a “threshold issue”. The Court held this to amount to a serious irregularity leading to substantial injustice such that the tribunal might have reached a different conclusion had it acted fairly in the circumstances. This issue was also remitted to the tribunal for determination.

Will we see anything “irregular” in 2020?

As outlined in the 2019 case examples above, the Court continues to apply a strict approach to challenges under section 68 of the Act with successful applications continuing to be few and far between. We are unlikely to see any change in approach in 2020 with successful challenges remaining very much in the minority, which will arguably support one of the selling points of international arbitration, namely the finality of the arbitration process due to the limited grounds of appeal.

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