In a rare example of a successful challenge under s68 of the Arbitration Act 1996 (the Act), in K v A [2019] EWHC 1118 (Comm), the English Court held that there was a serious irregularity when the GAFTA Board of Appeal (the Tribunal) found K liable based on an interpretation of a clause in the contract which had not been argued by A. The Court concluded that the Board may have reached a different view if K had had an opportunity to address the argument, and remitted the Award back to the Tribunal. The application for leave to appeal under s69 of the Act was rejected as the Court found that there was no error of law in the Tribunal’s finding that the payment obligation on K was to make payment into A’s account, not just to A’s bank.

The case arose following the hacking of the intermediary broker’s (V‘s) email accounts. Whilst A had provided the correct account details to V, the details provided to K (purportedly by V but actually by the fraudster), resulted in the payment of the contract price into the fraudster’s account. After discovery of the fraud, a payment shortfall arose out of complications in the eventual payment of the purchase price to A. A sought to recover the shortfall in the arbitration.

The case shows the importance of understanding where the risk passes under a contract for fraud or hacking of the type which can interfere with performance by the parties of their contractual obligations.

Background

The parties contracted for the delivery by A of meal to K under GAFTA Form 119 (the Contract) After A loaded the goods onto a vessel (which it was agreed constituted good delivery), A sent to V two emails attaching an invoice and a corrected invoice with a new date, each stating the correct contract price and providing bank account details for payment (the correct A account). V’s email records showed that V forwarded the emails to K. K denied receiving the emails but received emails appearing to come from V with attachments directing payment to a different account, at a different branch of the same bank. K unknowingly made payment to the fraudulent account. After various communications in which the fraud was discovered, the payment eventually made it to the correct A account. However, there was a shortfall attributable to currency conversions. A claimed the shortfall against K in the arbitration.

The Award of the GAFTA Board of Appeal (the Tribunal) (on de novo rehearing of the dispute)

In the Award, the Tribunal concluded that it was impossible on the evidence to determine where or how the fraud had taken place. The Tribunal found K liable for the balance of the price because: (i) the emails sent by A to V contained the correct bank details; (ii) by reason of Clause 18 of the Contract these communications constituted good notice because V was acting in the capacity of broker; (iii) accordingly, under the Contract, K bore the risk of receipt of the incorrect bank details which caused payment to be made to the incorrect account; (iv) K’s duty was to transfer the whole price into the account nominated by A, which K failed to do and K was therefore in breach of contract; and (v) A was entitled to receive 100% of the invoice amount in cash equivalent in the nominated account and the difference was recoverable by A from K.

Section 69: Permission to appeal for error of law refused

In seeking leave to appeal under s69, K argued that the Tribunal made an error of law in holding that its payment obligation was to ensure payment into A’s account at the bank. K said on a true construction of the Contract, its obligation was only to pay the price into the seller’s bank, who were the seller’s agent to receive payment. The Court disagreed, finding that the Contract clearly contemplated that, in order for K to pay the purchase price “in cash” (as per the Contract), A would identify not only the bank and the branch but the destination account. The Court rejected K’s position that the Tribunal had treated the payment obligation as one to ensure crediting of A’s account by A’s bank: “reading the Award as a whole without an unduly critical attempt to pick holes in it“, it was clear that the Tribunal’s reasoning was that the payment obligation was not fulfilled unless transfer instructions were accompanied by the destination account details notified by A. K’s alternative argument that the obligation was, in any case, satisfied on the facts was rejected as it depended on messages which were not included in the Tribunal’s findings of fact and were not admissible before the Court on a s69 application. Leave to appeal under s69 for an alleged error of law was therefore rejected.

Section 68: serious irregularity leading to substantial injustice

Decision on argument not raised: K also argued that there was a serious irregularity within the meaning of s68 because, relying on Clause 18 of the Contract, the Tribunal had treated notification of the destination account details to V as broker as sufficient to constitute notification to K, whereas it was common ground that A had not relied on Clause 18 and K had no opportunity therefore to address the point.

The Court found that: (i) the Award meant K had to pay more than the contract price and if the Tribunal was wrong on Clause 18, there was substantial injustice; (ii) reliance on Clause 18 was at the heart of the Tribunal’s conclusive reasoning; and (iii) the Tribunal may have reached a different view if K had had an opportunity to address the argument regarding Clause 18. There was therefore a serious irregularity within the meaning of s68 of the Act and the Court remitted the Award to the Tribunal.

Failure to deal with K’s arguments: by analysis of the Award, the Court rejected K’s assertion that the Tribunal failed to deal with certain of K’s arguments; in particular, K having made such arguments in an application under s57 for correction of the Award, the Tribunal had confirmed that it had considered all submissions.

Relationship between s68 and s69

The Court confirmed that an application based on s69 can be made in respect of points adopted by the tribunal of its own motion as part of the reasons for their conclusions. However, it found that where this conduct forms a successful ground of challenge under s68, the appropriate course is to remit the question back to the parties’ chosen tribunal rather than for the court to address the merits of the point under s69.

Award on interest

The Court declined to address or grant relief in relation to an application under ss67, 68 and 69 in respect of the Tribunal’s award of interest on the full contract price on the basis that A undertook not to enforce that element of the Award.

Comment

The case serves as a reminder that a tribunal which proposes to determine a dispute on the basis of an argument not advanced by the parties must give the parties an opportunity to address that argument or risk a challenge to its award. The costs and inconvenience involved in so doing, even after a merits hearing, are likely to be significantly less than the costs and uncertainty involved in challenge proceedings.

Also of interest in a world where cyber-security concerns abound and hackers are becoming more sophisticated, are the circumstances which led to this dispute. The intervention of a third party fraudster led the parties to focus on the transfer of risk in the contract in respect of the electronic notices exchanged between them, including via a broker. Commercial parties must be aware of the security of not only their own systems, but those of third parties who act as their agent in commercial transactions.

For more information, please contact Nick Peacock, Partner, Hannah Ambrose, Senior Associate, or your usual Herbert Smith Freehills contact.

Nicholas Peacock
Nicholas Peacock
Partner
+44 20 7466 2803
Hannah Ambrose
Hannah Ambrose
Senior Associate
+44 20 7466 7585