Posted: 09/08/2018
Gloriously unaffected by the maelstrom of uncertainty surrounding Brexit, arbitration offers a welcome point of anchorage in an otherwise shifting legal landscape. This article reviews some of the key cases so far this year, and seeks to illustrate to practitioners and parties alike the benefits of arbitration and the UK courts’ support for it as a process.
Section 67 of the Arbitration Act 1996 provides that a party can challenge an arbitral award at court on the grounds that the tribunal lacked ‘substantive jurisdiction’. If the challenge is successful, the court may declare the arbitral award to be of no effect (in whole or in part) or it may set the arbitral award aside (in whole or in part). Historically, section 67 challenges have proved hard to win – but that does not seem to stop parties from trying.
Need for speed
In Exportadora de Sal SA de CV v Corretaje Maritimo Sud-America no Inc [2018], the claimant (ESSA), a Mexican salt-mining company, entered into a ship building contract with the defendant (CMSA). The underlying contract was governed by English law, but as a state entity, ESSA was also subject to regulatory procurement requirements. When ESSA failed to pay an instalment or respond to a notice of default, CMSA commenced arbitration proceedings (August 2015).
In September 2016, the final hearing was fixed for 5 December 2016. In November 2016, a decree was made in Mexico declaring the tender process under which CMSA had won the contract to be a nullity. On 22 December 2016, ie after the final hearing, at which ESSA had participated on the merits, it relied on that decree to challenge the arbitrator’s jurisdiction.
The court refused ESSA’s section 67 challenge. Its only claim was that the decree in November 2016 somehow took away the arbitrator’s substantive jurisdiction. Baker J held that it did not do so. Had it done so, one would expect ESSA (acting only with reasonable diligence) to have objected to jurisdiction a month or so earlier. Instead, ESSA had taken part in the arbitral proceedings without making any objection that the arbitrator lacked substantive jurisdiction.
Under section 73(1), a participating party cannot raise an objection as to the tribunal’s substantive jurisdiction later unless they show that, at the time they took part or continued to take part in the proceedings, they did not know and could not with reasonable diligence have discovered the grounds for the objection. ESSA had been aware since late August 2016 that a decree as to nullity was distinctly possible yet it failed to act until late December. In Baker J’s view, ESSA failed to comply with the requirement under section 73(2) to raise the assertion as soon as possible ‘when it failed to do so within a working day or two of receiving [the decree]’ (paragraph 46).
Witness evidence
Baker J took the opportunity to remind the parties that: “The content of any witness statement, beyond a bare identification of exhibited documents, can and should be limited to matters of fact intended to be proved, if disputed, by calling the maker of the statement as a factual witness at the final hearing of the claim” (paragraph 25). The party’s case as to what those documents prove and the conclusions to be drawn from those documents should be in the arbitration claim form as part of the ‘Remedy claimed and grounds on which claim is made’. Setting out the detailed case as to the material facts, with explanatory comment or an outline of the argument in a single witness statement from the solicitor may well be convenient – but that does not make it ‘necessary or appropriate’.
Separability and scope
In two recent section 67 challenges, the courts have considered and applied the approach adopted by the House of Lords in Fiona Trust & Holding Corp & Others v Privalov & Others [2007]. Fiona Trust is authority that the arbitration agreement is a distinct and separate agreement from the underlying principal contract, which can be void or voidable only on grounds which relate directly to the arbitration agreement and not merely as a consequence of the invalidity of the main agreement (paragraphs 17 and 18).
In Dreymoor Fertilisers Overseas PTE Ltd v Eurochem Trading GmbH [2018], the claimant, Dreymoor, was an international trading company which, amongst other things, bought fertiliser from the defendant, ECTG, to re-sell to third parties in India whilst acting as ECTG’s agent and receiving commission. ECTG claimed that there were corrupt arrangements between Dreymoor and two of ECTG’s former senior employees: namely that Dreymoor bribed the employees in order to guarantee itself volumes of high-margin products and substantially better agency terms.
ECTG’s claims related to two umbrella agreements, and subsequent individual sales agreements. One of the umbrella agreements contained the Short Form LCIA clause, and all its associated sales contracts contained the Long Form LCIA clause. The other umbrella agreement did not contain an arbitration clause, but all the associated sales contracts contained the Long Form LCIA clause. ECTG commenced arbitration proceedings in reliance on these clauses.
Under section 67 of the act, Dreymoor challenged the tribunal’s jurisdiction to deal with the bribery claim on the basis that the sales contracts were not intended to apply to bribery allegations, and these allegations were dependant on an agency agreement, under which there was no agreement to arbitrate.
Butcher J held, applying Fiona Trust, that the arbitration clause applied to the bribery allegations as a reasonable business person would not have intended that a question of whether a sales contract had been induced by bribery should only be resolved under the dispute resolution procedure of the agency agreement, and not the sales contract. A clause which refers disputes ‘arising out of’ the contract is apt to refer disputes which relate to non-contractual claims, including for pre-contractual misrepresentation and antecedent bribery inducing the contract (paragraph 53). Therefore, the section 67 challenge failed.
Similarly, in Uttam Galva Steels Ltd v Gunvor Singapore PTE Ltd [2018], the Commercial Court dismissed a section 67 challenge, holding that bills of exchange were covered by the master agreements for the sale and purchase of nickel. The master agreements incorporated the defendant’s general terms and conditions, which included an arbitration clause. Although he found that the challenge had been made out of time, Picken J held that “it ought, in general at least, to be assumed that, when agreeing an arbitration clause, reasonable (or rational) businessmen would not contemplate fragmentation as regards dispute resolution”(paragraphs 47/48).
Arbitration clauses therefore remain very powerful and far-reaching in their scope. As the above cases demonstrate, they may be deemed to catch not only the contracts in which they appear but also related contracts; and not only contractual disputes, but any type of dispute arising out of the contract in question.
Rehearing not appeal
In Jiangsu Shagang Group Co Ltd v Loki Owning Company Ltd [2018], the claimant (JSG) challenged the award of an arbitral Tribunal under section 67 of the act. The defendant, LOCL, had entered into a charterparty agreement (the charter) with Shagang Shipping Co Ltd (Shagang), now in liquidation. The charter stated that the charterparty was made between LOCL and Shagang ‘to be guaranteed by JSG’. It also included an arbitration clause to arbitration in London. It was signed by LOCL but not by either Shagang or JSG.
Shagang repudiated the charter and LOCL commenced arbitration, alleging that JSG had guaranteed Shagang’s obligations under the charter. JSG denied any knowledge of the charter or guarantee at the time they were alleged to have been made, arguing at the outset of the arbitration that the tribunal did not have jurisdiction, and the tribunal rejected its application for the court to determine jurisdiction under section 32 of the act. The tribunal then found for LOCL on the preliminary issue of whether JSG had authorised the guarantee on the basis of the evidence before it, and subsequently found in favour of LOCL in terms of liability and quantum.
JSG then applied to the Commercial Court to have the award set aside on the basis that the tribunal did not have substantive jurisdiction under section 67. An uphill struggle, you might think: but Mrs Justice Carr, hearing the application, emphasised that a challenge under section 67 ‘proceeds by way of re-hearing rather than review … and a party is (in general) entitled to adduce evidence which was not before the Arbitrators’ (paragraph 13). JSG therefore had an unfettered right to a full judicial determination on the updated evidence.
Carr J held that the burden was on LOCL to positively establish the existence of an agreement to arbitrate (by proving JSG guaranteed the charter). On the basis of the fresh evidence before the court, both written and oral, LOCL had not established on the balance of probabilities that JSG authorised the guarantee. Accordingly, there was no valid arbitration agreement between the parties such as to give the arbitrators substantive jurisdiction over LOCL’s claim, and the section 67 challenge was allowed.
Under section 68 of the act, a party can challenge a tribunal’s award if there has been a serious irregularity that has caused or will cause substantial injustice to the applicant. The irregularity can be in respect of the tribunal, the proceedings or the award; but it must relate to procedural irregularity rather than the tribunal’s decision itself.
Issues and injustice
The recent case of Orascom TMT Investments SARL v Veon Ltd [2018] is a good example of the courts’ likely approach to a section 68 challenge.
Section 68(2)(d) allows a party to challenge an award where there has been a failure by the tribunal to deal with all the issues. In this case, the claimant (Orascom) had sold the defendant (Veon) its shareholding in an Italian telecoms group. A dispute arose whereby Veon asserted that Orascom was obliged to indemnify it for financial loss suffered as a result of Veon settling claims made by the tax authorities post sale, but which related to audits that pre-dated the sale. The tribunal made an award in Veon’s favour.
Orascom challenged the award on the basis that the tribunal failed to deal with the lawfulness of the settlement under Italian law, which went to the reasonableness of the settlement.
Baker J held that it is not sufficient to engage section 68 by simply asserting that a specific finding of an issue has not been dealt with separately by the tribunal in the award. Any proposition advanced by one party and disputed by another creates an issue. If for some reason it is not dealt with in the award, a party could say that there had been a failure by the tribunal to deal with an issue. However this, as the parties themselves agreed, did not feel right: ‘because it does not feel right to say, no matter the circumstances, no matter the importance or significance of the point to the way in which the case has been advanced overall or is determined by the arbitrators, that failure to deal with something that was in issue before them is, without more, irregular’ (paragraph 27).
The word ‘issue’ used in section 68(2)(d) must ‘take colour’ from the way the section itself is drafted (paragraph 27) and also ‘from how it is said to matter… to the analysis of the claim or defence, as the case may be’ (paragraph 37). In essence, section 68(2)(d) will only be engaged if any failure to deal with the issue has caused or will cause substantial injustice to the party. In this case, Baker J did not consider that failure engaged section 68.
Fairness (or otherwise)
By contrast, in Reliance Industries Ltd and another v Union of India [2018], the claimant complained that the tribunal reached its decision based on matters not raised by the parties, and duly raised a challenge under section 68(2)(a) (failure by the tribunal to comply with its general duty). This interlinks with section 33 of the act, which requires the tribunal to act fairly and impartially between the parties.
Popplewell J dismissed the challenge, holding that: ‘It is always important to keep in mind the distinction between a lack of opportunity to deal with a case and a failure to recognise or take such opportunity… It is enough if the point is "in play" or "in the arena" in the proceedings, even if it is not precisely articulated’ (paragraph 32).
The court took a similar fairness-based approach in Grindrod Shipping PTE Ltd v Hyundai Merchant Marine Co Ltd [2018], in which Sir William Blair looked at the substance of the parties’ arguments rather than the way in which, or the heads under which, they were presented. There was no unfairness where the matters relied on by the tribunal were in play, albeit raised in a different way.
Attention to detail
Baker J also took the opportunity in Orascom to give guidance on drafting an arbitration claim form when applying to challenge an award under section 68 (or indeed section 67) of the act.
In these circumstances, the purpose of the claim form is not just to identify under which provision a claim is being made. Given that there is no procedure for exchanging statements of case in these challenges, the claim form should stand on its own as a sufficiently detailed and particularised statement of case. In other words, less is not more here. The claim form should not just contain the bare statutory requirements; it should contain enough detail to let the other parties and the court understand the nature of the challenge, the grounds on which it is made and any questions or issues that will need to be dealt with at a hearing.
Baker J also returned to a familiar theme: witness statements, by contrast, should contain facts and evidence, not comment or submissions. A party’s case should wholly be contained in the claim form.
Security for costs
Parties should also be aware that the court may order security for the costs of a section 68 challenge, even where the claimant is commercially funded (Progas Energy Ltd & Ors v The Islamic Republic of Pakistan [2018]). In this case, Picken J held that an offer by the funders to meet any adverse costs order did not mean that the claimant had assets available for the section 68 challenge. Definitely something to bear in mind if you are considering raising, or indeed are required to defend, a challenge to an arbitral award.
Under section 69 of the act, a party to arbitration can appeal to the court on a question of law arising out of an award, unless the parties have agreed otherwise, and provided the court grants leave to appeal (or all parties agree). Even if the right to appeal is not excluded in the arbitration agreement, section 69(3) sets a high threshold for applicants to reach in order to get permission to appeal.
Threshold questions
In Agile Holdings Corp v Essar Shipping Ltd [2018], another charterparty case, the court allowed an appeal on a question of law. The charterer, Essar, argued that the court could not hear the appeal because the scope of the phrase in issue was not something which the tribunal had been asked to determine. Accordingly, said Essar, the appeal did not involve a question of law arising out of the award or one which the tribunal was asked to determine (section 69(3)(b)).
In response, the claimant Agile argued that Popplewell J, who had granted leave to appeal, had done so on the basis of very full written arguments, including on that point. Having granted leave, that particular point could not now be re-argued and the court should move straight to a substantive consideration of the question of law.
Waksman J’s judgment gives useful guidance as to the threshold questions a judge must decide at the permission-to-appeal stage. Some, such as whether the determination of the question would substantially affect the rights of one or more of the parties, whether the question is one of general public importance and whether it is just and proper for the court to determine the question, are final questions which will not arise again (paragraph 18). Others, such as those dealing with the merits of the underlying question for appeal, will fall for consideration again: ie was the decision of the tribunal ‘obviously wrong’ or at least ‘open to serious doubt’ (paragraph 19)?
However, he found that the proper characterisation of the requirements that first there is a question of law (the law question) and second that the law question was one which the tribunal had been ‘asked to determine’ (the determination question) is rather more nuanced. Only the determination question was in issue here, and Essar argued that both questions could be freely re-argued at the appeal.
Waksman J did not agree: ‘While the threshold conditions must be satisfied, once a judge decides that they are, surely the court then has jurisdiction to determine the appeal. If it were otherwise, then, presumably all of the threshold conditions could be re-argued on the basis that if a different view was taken the court would in truth have no jurisdiction to deal with the appeal at all, even if they were the conditions regarding public importance or affecting the rights of the parties. In my view, that cannot be right’ (paragraph 26).
He concluded that, with regard to the determination question, it is quite difficult to see why that should necessarily arise when dealing with the merits of the appeal, ie the answer to the question of law. It might be less difficult where the law question itself is concerned. There were, moreover, strong policy reasons for making the decision to grant leave as efficacious and immune from further consideration as possible.
Questions of timing
In Daewoo Shipbuilding v Songa [2018] the defendants applied to strike out or summarily dismiss the claimant’s application for an extension of time to appeal two arbitral awards under section 69. The defendants succeeded and the claimant’s application was struck out.
The court held that where a party applies to the tribunal to correct clerical errors in an award under section 57, the 28-day time period for appealing under section 70(3) will ordinarily run from the date of the original award, and not the date of the correction. Nonetheless, Bryan J recognised that there may be cases where correction to the award is necessary to enable a party to know whether it has grounds for an appeal. In such cases, where there is a material application for a correction under section 57, the 28-day period will run from the date of the award as corrected.
What should a party do if there is doubt or disagreement as to the materiality of the corrections sought? Bryan J suggests issuing an application for an extension of time before the 28 day period expires, and indeed seeking permission to appeal to the extent possible at that time.
As these latest developments show, it remains hard – but not impossible – to challenge an arbitral award successfully, whether on the grounds of substantive jurisdiction, serious irregularity or question of law. Furthermore, they demonstrate that the UK courts support and will uphold the arbitral process the parties have chosen, as far as is compatible with the delivery of justice to the parties. A neat form of quality assurance, if you will, while avoiding some of the downsides to the litigation process itself.
This article was published in Commercial Litigation Journal in July 2018.
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