In the case of The Secretary of State for the Home Department and Raytheon Systems Limited  EWHC 311 (TCC) and  EWHC 4375 (TCC), the English Court has set aside an arbitral award for serious irregularity under s68(2)(d).
Mr Justice Akenhead found that the Tribunal in question had failed to consider two important issues (one of liability and another of quantum) such that a serious irregularity had occurred which had caused substantial injustice to the claimant. In a later hearing, the judge considered the appropriate relief for that serious irregularity, concluding that the case was one in which it was appropriate to set aside the Award and for the case heard by a new Tribunal.
The two decisions add to the relatively sparse caselaw on these two provisions of the Act. The first is one of very few to consider and make a finding of serious irregularity under s68(2)(d). In grappling with when it is “inappropriate” to remit a matter back to the original arbitral tribunal, the second decision provides helpful parameters for when set-aside is the correct relief for such a finding.
Given confidentiality considerations, Mr Justice Akenhead initially ordered that the identities of the parties not be disclosed. With the parties’ agreement, the judgments were later made public.
The Defendant, Raytheon Systems Limited (Raytheon), was employed to design, develop and deliver technology systems to the Claimant, The Secretary of State for the Home Department (the Home Office), under a very high value contract. The Home Office purported to terminate the contract in July 2010 and subsequent disagreements arose regarding that termination. The Home Office started an English-seated arbitration, with the parties nominating English and American arbitrators, and a Canadian as Chair. The arbitrators produced a lengthy Partial Final Award on 4 August 2014, which was subsequently corrected in two memoranda. The Award decided that the Home Office had unlawfully terminated the contract, the Home Office had repudiated the contract and Raytheon had accepted the repudiation. The Arbitrators awarded Raytheon damages of over £126m with other sums of approximately £60m plus interest.
The set aside proceedings
The Home Office applied to the English court to have this Partial Final Award set aside under s68(2)(d) of the Act. s68 states as follows:
(1) A party to arbitral proceedings may (upon notice to the other parties and to the tribunal) apply to the court challenging an award in the proceedings on the grounds of serious irregularity affecting the tribunal, the proceedings or the award…
(2) Serious irregularity means an irregularity of one or more of the following kinds which the court considers has caused or will cause substantial injustice to the applicant-
(d) failure by the tribunal to deal with all the issues that were put to it;
(3) If there is shown to be serious irregularity affecting the tribunal, the proceedings or the award, the court may-
(a) remit the award to the tribunal, in whole or in part, for reconsideration,
(b) set the award aside in whole or in part, or
(c) declare the award to be of no effect, in whole or in part.
The court shall not exercise its power to set aside or to declare an award to be of no effect, in whole or in part, unless it is satisfied that it would be inappropriate to remit the matters in question to the tribunal for reconsideration.
The Home Office maintained that the tribunal had disregarded key parts of the Home Office’s case relating to contractual default and only addressed whether there was breach by the Home Office of a condition precedent in the termination clause. The Home Office also argued that the Tribunal had ignored the Home Office’s case on the value of assets transferred after termination and on the need for any analysis of quantum to exclude costs attributable to Raytheon’s actions and default.
The Court’s analysis
Mr Justice Akenhead criticised the amount of documentation provided by the parties in relation to the application and stressed the need to limit material to what “is really and positively relevant, particularly where the parties are before a specialist court which has specific experience of the type of contract with which the application is concerned“.
Turning to the contract, the arbitration and the Partial Award, Akenhead J gave detailed consideration to the content of the Partial Award and the issues addressed by the Tribunal.
Akenhead J then turned to consider s68 and the law and practice about its role and application. He noted that s68 reflected the “internationally accepted view that the Court should be able to correct serious failures to comply with the “due process” of arbitral proceedings“. The serious irregularity requirement was a “high threshold“, and the requirement that that serious irregularity has caused or will cause substantial injustice to the applicant was there to eliminate technical or unmeritorious challenges. S68 should not be used to get around restrictions on appeals of law or fact, and the court should strive to uphold an award where possible.
Turning to s68(2)(d) in more detail, Akenhead J again stressed the high threshold applicable to the provision. There is no failure to deal with an issue where arbitrators have misdirected themselves on the facts. In order to meet the requirement for substantial injustice, the applicant needed to show that his position on that issue was “reasonably arguable” and, had the tribunal found in his favour, the tribunal might well have reached a different outcome in the award.
Having considered the law, Mr Justice Akenhead addressed the two liability and three quantum grounds of challenge made by the Home Office. The judge considered that Liability Ground 2 and Quantum Ground 3 were made out. With regard to liability, the Tribunal had not addressed whether or not all or substantially all of the delay was the actual fault or responsibility of Raytheon and Akenhead J concluded that he had little doubt that “if the tribunal had considered the issue in such terms, there is a real chance that it would have to reconsider some of its key findings“. With regard to quantum, he concluded that the Home Office had clearly raised with the Tribunal that when calculating quantum relating to unjust enrichment, due account should be taken of the extent to which the costs incurred related to any delay, disruption and inefficiency which was the fault of Raytheon. The Tribunal had overlooked this important issue, the consequence of which was a substantial award in Raytheon’s favour.
Akenhead J concluded that there was serious irregularity under s68(2)(d) and that substantial injustice had resulted to the Home Office from the tribunal’s omission to deal with these issues. He fixed a later hearing to determine the question of relief.
The hearing to determine relief under s68(3): remission or set aside?
On 16 January 2015 Mr Justice Akenhead heard arguments from the parties regarding the most appropriate relief to be awarded given his finding of serious irregularity.
Akenhead J noted that there was “no previous authority which substantially mirrors the facts of the current case and, indeed, there are relatively few reported decisions on Section 68(2)(d)”. As such, there was no clear guidance as to which relief under s68(3) was appropriate in the circumstances.
S68(3) provides that remission is the “default” option for a finding of serious irregularity, and the Court should only set aside if it would be “inappropriate” to remit. However, there was no authority to suggest that it would invariably be inappropriate to remit where a particular ground under s68(2) had been made out.
Akenhead J considered Merkin’s Arbitration Law regarding s68 which listed a number of potential scenarios where set aside was the appropriate relief. These included (amongst others) where one or both parties have lost confidence in the arbitrators, where remission would require a full hearing or would inevitably lead to the award being reversed.
The judge then turned to consider caselaw regarding s68 challenges, noting that there had been few cases under the Act in which a successful application under s68(2)(d) had led to anything other than remission. He concluded that “one needs to consider whether there is a real risk, judged objectively, that even a competent and respectable arbitral tribunal, whose acts or omissions have been held to amount to serious irregularity causing substantial injustice may sub-consciously be tempted to achieve the same result as before”. He also concluded that the costs of remission compared with the costs of the new tribunal and the passage of time were also relevant factors in deciding whether remission was, or was not, appropriate.
Mr Justice Akenhead concluded that this was a case in which the award should be set aside in total and the matter resolved by a different arbitral tribunal. The two grounds he had upheld were serious in terms of irregularity. It would be “invidious and embarrassing” for the tribunal to try to seek to re-determine the same issues. Even if the tribunal were able to do so conscientiously and competently, if the same conclusions were reached, it would be difficult, objectively, to show that justice had been done.
In considering the proceedings before the new Tribunal, Akenhead J anticipated that much of the factual and expert evidence would be redeployed and, potentially, rationalised. He also “anticipated” that, if a party which had lost on a given factual or legal issue before the previous tribunal argued it again and loses before the new tribunal, they would face an indemnity cost sanction, whatever the overall result.
This is the latest episode in the long-running dispute between Raytheon and the Home Office regarding the eBorders contract. The project has been dogged by controversy, and the Home Office has faced serious criticism for wasting public money. The resolution of the dispute by arbitration has been of interest to many practitioners, and the decision to make these challenge proceedings public has placed the project back in the media spotlight.
Setting aside the political context, both decisions also have considerable legal interest, adding to the relatively sparse caselaw on these two provisions of the Act. The first is one of very few to consider and make a finding of serious irregularity under s68(2)(d). In grappling with when it is “inappropriate” to remit a matter back to the original arbitral tribunal, the second decision provides helpful parameters for when set-aside is the correct relief for such a finding.
It remains the case that the English court applies a high threshold when hearing s68 challenges. Akenhead J went to lengths to emphasise the importance of the issues which the tribunal had failed to consider and that there was a real chance that substantial injustice had been caused to the Home Office. Yet in finding that serious irregularity had occurred, the judgment provides helpful insight into when a tribunal will be found to have failed to deal with all the issues put to it. For tribunals, it shows, again, the importance of being shown to have dealt with and considered, even if in passing, the issues placed before it by the parties.
With regard to Akenhead J’s decision to set aside this Award, one point which is of particular interest is his strong “anticipation” of costs sanctions against a party who seeks to run arguments before the new tribunal that they lost before the prior tribunal. This suggestion appears to run counter to the idea that the original award has been “set aside”, and has therefore ceased to to have legal effect, at least within the jurisdiction of the court setting it aside. It seems doubtful that the parties’ ability to make arguments before the new tribunal, faced with the task of considering the dispute de novo, should be limited by the risk of costs sanctions. Akenhead’s “anticipation” has strong economic and procedural merit, but it does not appear to accord with the purpose or intent behind the set aside procedure.
Permission to appeal has been granted.
For further information, please contact Craig Tevendale, Partner, Vanessa Naish, Professional Support Lawyer or your usual Herbert Smith Freehills contact.