In Gracie and another v Rose [2019] EWHC 1176 (Ch), the English court dismissed a challenge to an arbitration award under s68 of the Arbitration Act 1996.

While the court found that the Arbitrator’s reasoning in relation to certain topics was ambiguous, it held that this was insufficient for a successful s68 challenge. The judgment contains useful guidance on the scope of s68 and its interplay with other provisions of the 1996 Act. In particular, the court emphasised that the applicant had an obligation to first request the arbitrator to correct, supplement or clarify the award under s57 before bringing a challenge in the courts.

Background

Following the death of one of two shareholders of a company, a dispute arose as to the terms on which the Continuing Shareholder was required to purchase the Retiring Shareholder’s shares and as to the right to dividends. The Retiring Shareholder’s executrix successfully obtained an arbitration award determining the calculation of the share price paid by the Continuing Shareholder and confirming the Retiring Shareholder’s right to equal dividends. The Arbitrator was a chartered accountant, who received advice from solicitors on various legal issues.

The Continuing Shareholder sought to challenge the Award under s68 of the 1996 Act on the basis that the Arbitrator:

  • failed to deal with the Continuing Shareholder’s defence that the Shareholders’ Agreement had been rectified, changing the calculation of the share price (“Ground 1“);
  • failed to deal with a piece of evidence and/or exceeded his powers in relation to the dividend issue (“Ground 2“); and
  • exceeded his powers and/or failed to conduct the proceedings in accordance with the procedure agreed by the parties when he decided the issue of quantum in his Award rather than dealing with quantum at a separate hearing (“Ground 3“).

Ground 1

The Arbitrator had found that the share price should be calculated in accordance with the Shareholders’ Agreement “with no modification“. This meant the share price was calculated by reference to the “aggregate” of profits. The Continuing Shareholder had argued that there had been a mistake in the Shareholders’ Agreement which had either been varied or, alternatively, rectified to mean “average” of profits – a change that would have significantly lowered the price he had to pay for the shares. The Continuing Shareholder challenged the Award on the basis that the Arbitrator failed to deal with this argument.

The court noted that while rectification was not expressly discussed in the Award, neither was variation. It was undisputed that the Arbitrator summarised the Continuing Shareholder’s arguments by referring to two separate issues relating to “change by mutual agreement” and to “mistake“. Against this background, the Arbitrator’s rather concise finding that “The basis of calculation… should be as set out in the [Shareholders’] Agreement with no modification” was, in the court’s opinion, broad enough to cover rectification and/or variation. Accordingly, while the Award was therefore ambiguous as to the basis for this finding, it could not be said with certainty that the Arbitrator had failed to address the issue of rectification.

In addition, the Court noted that s70(2) bars an applicant from bringing a s68 challenge to an award where it has not “first exhausted… any available recourse under section 57” which allows parties to apply to the arbitral tribunal for a correction of an award to “remove any ambiguity in the award“. The challenge under Ground 1 therefore also failed on this basis.

Ground 2

The court also dismissed the second challenge. In the Award, the Arbitrator had found that the Retiring Shareholder was entitled to dividends equivalent to those received by the Continuing Shareholder. The Continuing Shareholder had argued that the sums he had received were not dividends but “drawings”, more akin to a loan than a dividend.

The court found that it was clear that the Arbitrator had considered the Continuing Shareholder’s argument as well as the evidence put forward. Section 68(2)(d) of the 1996 Act did not allow a court to review the merits of the Arbitrator’s decision.

Similarly, the court dismissed the challenge under s68(2)(b) alleging that the Arbitrator had exceeded his powers. The court found that the real complaint was not that the Arbitrator lacked the power to make a decision on dividends, but that he had used his decision-making power to come to the wrong result. The court refused to review the merits of the Arbitrator’s decision.

Ground 3

The Continuing Shareholder also argued that in addressing quantum, the Arbitrator had exceeded his powers and/or failed to conduct the proceedings in accordance with the procedure agreed by the parties. This argument was based on a letter to the parties, in which the Arbitrator suggested dealing with the issue of quantum at a separate hearing, as further expert evidence might be required.

The court stated this challenge was “surprising” in that the letter clearly only referred to the quantum aspect of a counterclaim brought by the Continuing Shareholder in relation to the disclosure of confidential information, not to quantum generally. In any event, the Arbitrator’s decision to deal with quantum in his Award had caused no substantial injustice.

Comment

This case reconfirms that arbitration awards can only be challenged successfully under the 1996 Act in very limited circumstances. The court will not generally review the merits of an award and a s68 challenge will not be successful unless in the view of the court the applicant can show substantial injustice. Where a party can obtain suitable relief from the arbitral tribunal itself, the English courts will not uphold a challenge. In this respect, the judgment contains useful guidance on the relationship between s68 challenges and the other remedies under s57(3) of the 1996 Act.

The judgment also contains useful guidance for arbitrators, explaining the ‘desirability’ of all issues in the case being listed in the award – even if the tribunal’s decision on key points makes it unnecessary to deal with some of them.

For further information, please contact Chris Parker, Partner, Jerome Temme, Associate, Rebecca Warder, Professional Support Lawyer, or your usual Herbert Smith Freehills contact.

Chris Parker
Chris Parker
Partner
+44 20 7466 2767
Jerome Temme
Jerome Temme
Associate
+44 20 7466 2607

Rebecca Warder
Rebecca Warder
Professional Support Lawyer
+44 20 7466 3418