English High Court rejects Section 68 challenge to arbitral award on the grounds of “serious irregularity”

In the case of Republic of Kosovo v ContourGlobal Kosovo LLC [2024] EWHC 877 (Comm), the English High Court (the High Court) has rejected a challenge by the Government of Kosovo (Kosovo) to an arbitral award on the grounds of serious irregularity, pursuant to Section 68 of the Arbitration Act 1996 (the Act). The final award was issued by a London seated ICC tribunal (the Tribunal), which held Kosovo liable to pay ContourGlobal Kosovo LLC (CKL) sums in excess of 20 million euros.

Section 68(2)(a) of the Act provides that an arbitral award can be set aside if an arbitral tribunal fails to comply with Section 33 of the Act, amounting to a “serious irregularity”, that causes “substantial injustice” to a party. Section 33 in turn requires that a tribunal must act fairly and impartially between parties, giving each party a reasonable opportunity to put its case, and to adopt procedures which provide a fair means for the resolution of the issues in dispute.

Kosovo argued that the Tribunal failed to comply with Section 33 of the Act, on the basis that the Tribunal had referred to certain deficiencies in the quantum evidence on record in a procedural order issued following the substantive hearing on the matter, but had not provided Kosovo with the opportunity to make further submissions on quantum in the light of this.  Instead, the Tribunal had issued a final award in favour of CKL. Kosovo alleged that the Tribunal accordingly contravened Section 33, amounting to a “serious irregularity“, thereby giving rise to grounds to set aside the award pursuant to Section 68(2)(a) of the Act.

The High Court dismissed Kosovo’s challenge, once again demonstrating that a challenging party must overcome a significant hurdle in order to successfully challenge an arbitral award for serious irregularity under Section 68.

Background

The arbitration arose out of a series of contracts pursuant to which CKL was to design, construct and maintain a power plant in Kosovo. Kosovo failed to perform certain conditions precedent under one of the agreements, as a result of which CKL terminated the agreements and claimed the contractual cap of up to €19.7 million of its development costs from Kosovo. Kosovo declined to pay the sums claimed, maintaining that it was not liable to CKL, and the dispute was accordingly referred to arbitration.

In the arbitration, Kosovo disputed both liability and quantum. Specifically in relation to quantum, Kosovo claimed that CKL failed to prove that it had incurred the development costs which it had claimed. For its part, CKL relied on quarterly summaries between August 2018 and April 2020 to prove that it had incurred the development costs, while Kosovo challenged this evidence and requested that CKL produce a variety of documents in relation to the issue of quantum. CKL then produced 1,577 invoices in response.

Throughout the arbitration, Kosovo maintained that CKL failed to prove the quantum it sought and argued that there were discrepancies between the quarterly summaries on which CKL relied and the invoices which had been produced.

Following the substantive hearing, the Tribunal issued a procedural order (PO5) which was concerned with the production of additional documents. The Tribunal stated in PO5, among other things, that it had not reached any decision on either the liability or the quantum issues raised in the case. On the quantum issues, the Tribunal remarked that the evidence and analysis was “not sufficiently complete” and that the Tribunal “may decide to appoint an expert to investigate and report on those matters pursuant to Article 25(3) [of the ICC Rules of Arbitration]. If so, the Tribunal will consult with the parties regarding the terms of reference for such an expert and the identification of an appropriate expert. Following this, the Tribunal issued another procedural order (PO6) which, among other things, reiterated this point.

Thereafter, the Tribunal proceeded to issue its final award, finding in favour of CKL on both liability and quantum.

Kosovo’s Challenge

Kosovo argued that the language of PO5 (as emphasised by PO6) created a reasonable expectation that the Tribunal “would not proceed to determine the quantum issue without further evidence or submissions“. Kosovo argued that in issuing its award without the benefit of such further evidence, the Tribunal breached its obligations under Section 33 of the Act.

Kosovo submitted that in order to comply with its duty to act fairly under Section 33(1)(a), there were only three alternatives available to the Tribunal after issuing PO5: (i) dismissing CKL’s claim for damages, (ii) appointing an expert, or (iii) summoning the parties to provide further evidence or submissions.

The High Court’s Decision

The Serious Irregularity Issue

The High Court rejected Kosovo’s interpretation of PO5. It asserted that a fair and reasonable reading of the text of PO5 made it clear that the Tribunal had not made any decision on either liability or quantum, and indeed this message was repeated in PO6.

The High Court emphasised that in interpreting procedural orders, the language used must be interpreted in a “reasonable and commercial way” considering “what a reasonable person, reading that paragraph in its relevant context, would have concluded the Tribunal was saying” rather than trying to find “technical inconsistencies and faults”.

The High Court held that through the relevant wording in PO5 and PO6, the Tribunal was merely reserving its right to appoint an expert should that be necessary when considering the quantum issues that arose before it. Nothing said in either PO5 or PO6 could reasonably justify the conclusion Kosovo was attempting to draw, to the effect that the Tribunal had decided that it could not proceed further on the quantum issue without additional evidence or submissions.

Additionally, the reference in PO5 to the insufficiency of evidence and analysis in relation to the development costs did not further Kosovo’s argument. The High Court held that this was a reference to a point made by a member of the Tribunal during closing arguments that the Tribunal would itself be required to complete the analysis. The appointment of an expert to carry out this analysis on behalf of the Tribunal was merely a suggestion – one way for the Tribunal to reserve its position regarding the appointment of an expert, and to notify the parties as to how it would proceed should it decide to do so. On that basis, the High Court also rejected the argument that the Tribunal should have notified Kosovo that it would depart from PO5.

The High Court further remarked that the Tribunal, which was comprised of experienced arbitrators, could not reasonably have intended to determine a quantum claim, which it expressly stated it had not decided at the time, through a single paragraph in a procedural order. Indeed, the Tribunal addressed the quantum issues comprehensively during the arbitration and in its award, and in dismissing Kosovo’s challenge, the High Court noted that it appeared to be an “after-the-event construct”.

Substantial Injustice

The High Court considered the substantial injustice limb of the test under Section 68 only in obiter, as it had already rejected Kosovo’s challenge. It commented that, in order for Kosovo to satisfy this requirement, it must have shown what the alternative outcome would have been had the Tribunal acted as Kosovo argued that it should have. In that regard, it noted that Kosovo had not set out what additional evidence or submissions it would have presented to the Tribunal to further support its analysis of the quantum issue, had the Tribunal given the parties the opportunity to do so. It was therefore “entirely unreal” to suggest that if the Tribunal had obtained the additional evidence in question, the consequence would have been the dismissal of the quantum claim in the arbitration.

Comment

This decision is another reminder of the significant threshold which parties must meet to successfully challenge an arbitral award under Section 68 of the Act. The High Court has once again confirmed the non-interventionist approach adopted by English courts in respect of London seated arbitrations, notably reminding parties that court intervention under the Act will only be justified in “extreme cases”, where the conduct of arbitration is so far removed from what can reasonably be expected from a just and fair arbitral process.

It is often the case that Section 68 challenges are founded upon allegations that the Tribunal has failed to take proper account of evidence, including that it has not taken into account additional evidence that may have been important in its decision.  Such challenges are very rarely successful, underlining the wide discretion granted to the Tribunal under Section 34(1) of the Act, which provides that “[i]It shall be for the tribunal to decide all procedural and evidential matters, subject to the right of the parties to agree any matter.

Finally, the case also underlines the importance of giving careful consideration to the “counterfactual” scenario in order to satisfy the substantial injustice test in a Section 68 challenge: even if something has gone badly wrong in the arbitration, can it be shown that the outcome would have been substantially different had it been done correctly?

For more information, please contact Craig Tevendale, Partner, Arushie Marwah, Associate (India), or your usual Herbert Smith Freehills contact.

Craig Tevendale
Craig Tevendale
Partner
Arushie Marwah
Arushie Marwah
Associate

The authors would like to thank Wajih Jaroudi for his contribution to this blog post. 

English High Court confirms that a non-participating party may contest jurisdiction even though an arbitrator has been appointed

In National Investment Bank Ltd v Eland International (Thailand) Co. Ltd and another [2022] EWHC 1168 (Comm), the English High Court considered the interaction between sections 72(1) and 18 of the English Arbitration Act 1996 (the “Act“). Section 72(1) allows a non-participating party to an arbitration to seek a declaration from the English Court as to the lack of jurisdiction of the tribunal, and section 18 of the Act gives the Court the power to appoint a tribunal where there is a failure of the appointment procedure between the parties.

The claimant, which was a non-participating party in an arbitration, sought a declaration from the High Court under section 72(1) that the sole arbitrator did not have jurisdiction. In response, the defendants argued that the effect of the Court having appointed the sole arbitrator pursuant to section 18 was to render the claimant a party to the arbitral proceedings and thus to preclude the claimant from relying on section 72.

The Honourable Mr Justice Foxton rejected this argument, finding that the section 72 application remained available notwithstanding the section 18 appointment and upheld the merits of the application. This decision will give comfort to non-participating parties to arbitration proceedings that the important protection for non-participants to an arbitration under section 72 remains firmly intact.

Background

This case arose from the commencement of conflicting court and arbitration proceedings in respect of the same matter. The claimant, NIB, entered into a series of agreements with the defendants, Eland Thailand and Eland Ghana (together, “Eland“) which provided that disputes “may be referred to an Arbitrator under the Laws of the United Kingdom in London”.

Eland Thailand commenced proceedings against NIB under these agreements before the courts in Accra, Ghana (the “Accra Proceedings“). Both NIB and Eland formally participated in the preliminary stages of the Accra Proceedings, with NIB seeking to join Eland Ghana as a party to its counterclaim.

However, Eland Ghana then applied to stay the Accra Proceedings in order to commence arbitration. The application was granted and Eland served a Notice of Arbitration on NIB. When NIB did not engage with the arbitration, Eland applied to the English High Court to appoint an arbitrator under section 18, with Mr Justice Baker ordering the appointment of a sole arbitrator.

In parallel, NIB successfully applied to set aside the stay of proceedings in the Accra Proceedings. NIB then applied to the High Court under section 72(1) for a declaration that the arbitrator who had been appointed in the arbitration did not have jurisdiction to decide the claims which were the subject of the Accra Proceedings.

Decision

In its application, NIB argued that by electing to pursue the claims through the Accra Proceedings, Eland had irrevocably waived its right to pursue the same claims in arbitration. Eland argued that no such waiver had taken place, but that in any event the Court’s appointment of the arbitrator pursuant to section 18 prevented NIB’s reliance on section 72.

The effect of the Court’s appointment under section 18

Section 18(4) of the Act provides that “[a]n appointment made by the court under this section has effect as if made with the agreement of the parties“. Eland argued that the appointment of an arbitrator by the Court under section 18 therefore meant that the non-participating party could be treated as having participated in the appointment process, thereby becoming a party to the arbitral proceedings. As section 72(1) limits the availability of section 72 to a person “who takes no part in the proceedings“, NIB would not be able to rely on section 72 – either because the effect of section 18(4) and the Court’s appointment means that NIB was a party to the proceedings or was deemed to have participated in the appointment process.

Foxton J was unable to accept this argument. He first confirmed that in order to exercise its powers under section 18, it is not necessary for the Court to reach a final decision on whether there is an arbitration agreement between the parties, or whether the dispute in question falls within the scope of that arbitration agreement. It is sufficient that the applicant can show a good arguable case to that effect. Consequently, it is possible to satisfy the pre-conditions for an appointment by the Court under section 18, yet for there to be either no valid arbitration agreement or for the matter in question not to fall within the scope of the arbitration agreement for the purposes of sections 72(1)(a) and (c).

Citing the Department Advisory Committee on Arbitration Law (“DAC“) Report on the Arbitration Bill (February 1996), Foxton J emphasised the important protection provided by section 72 to those who dispute the arbitral tribunal’s jurisdiction and take no part in the arbitral process. On Eland’s construction, that “vital” protection would be lost. There is nothing in the DAC Reports of February 1996 or January 1997 to suggest that section 18(4) was intended to preclude reliance on section 72.

Moreover, the erosion of the section 72 protection would operate in a “haphazard way”. For instance, reliance on section 72 would not be precluded where a contractually-designated body (rather than the court) appointed an arbitrator, or where a sole arbitrator is appointed by the participating party under section 17. Furthermore, section 17(2) is intended to address the same issue as section 18(4), namely, non-participation in the appointment process. However, section 17(2) uses different language which is not susceptible to the same purported preclusion of section 72 (“whose award shall be binding on both parties as if he had been so appointed by agreement”). Eland’s argument would therefore involve a “stark and unexplained distinction” between sections 17(2) and 18(4).

Foxton J considered the statutory language of sections 18(4) and 72(1) to be “clearly aimed at different issues”. Section 18(4) clarifies that an arbitrator’s powers and the effect of an award do not differ where the arbitrator in question is court-appointed rather than party-appointed. In short, section 18(4) is intended to apply to the outcome or effect of the appointment, but it does not apply to the participation of the non-participating party in the appointment process for any other purpose. Section 72(1), by contrast, refers to a person “alleged” to be a party to arbitral proceedings, and thus operates in circumstances where this is the issue in dispute which section 72 is intended to resolve.

Eland’s waiver of its right to arbitration

Foxton J also accepted that both of the Eland entities had, on the facts, elected to pursue the claims in the Accra Proceedings, and that they had therefore waived the right to refer those claims to arbitration – emphasising that this decision was based on the specific circumstances of this case and the status of Eland Ghana as a “sister company” to Eland Thailand. He therefore granted the declaration which NIB sought pursuant to section 72. He also relieved NIB of liability for the costs of Eland’s section 18 application.

Comment

This decision serves as a strong message to litigants that the “important protection” provided by section 72 to those parties who dispute a tribunal’s jurisdiction and take no part in the arbitral process is not eroded by section 18. An arbitral tribunal is competent to decide whether it has jurisdiction over the dispute submitted to it, and in most cases, parties challenging an arbitrator’s jurisdiction will make their case directly to the tribunal itself. However, Section 72 provides an alternative route to those parties who wish to challenge the tribunal’s jurisdiction, but prefer to have nothing to do with the arbitration and apply directly to the Court instead.

Foxton J’s comments on “the unattractive prospect of claims by companies in the same corporate group raising the same claims relating to the same contracts in court and arbitration” also serve as a reminder to be cautious about pursuing parallel proceedings in respect of the same matters via affiliate companies.

For more information, please contact Craig Tevendale, Partner, Louise Barber, Senior Associate, or your usual Herbert Smith Freehills contact.

The authors would like to thank Jordan Robinson for his assistance with this article.

Craig Tevendale
Craig Tevendale
Partner, London
+44 20 7466 2445
Louise Barber
Louise Barber
Senior Associate, London
+44 20 7466 2140

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In P v D [2019] EWHC 1277 (Comm), the English High Court set aside an arbitral award on the basis that the tribunal had reached a finding of fact on a core issue that had not properly been put to a witness in cross-examination and that the tribunal had based its decision on a case not properly argued by the parties. Under s68 of the Arbitration Act 1996 (the “Act”), the court has the power to set aside an award on grounds of serious irregularity. It is rare for the court to exercise this power – although that does not deter aggrieved parties from submitting applications to set aside. The judgment gives important guidance on the court’s approach on this important procedural issue, and addresses considerations of fairness to witnesses in cross-examination, and to the parties putting those witnesses forward.

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ENGLISH HIGH COURT DISMISSES S68 CHALLENGE TO ‘AMBIGUOUS’ AWARD

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.

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In particular, the Court held that an LCIA arbitral tribunal did not exceed the scope of its powers in ordering relief that was not available to an English court.

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English High Court orders indemnity costs in discontinued s.68 proceedings to challenge awards

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English High Court recognises arbitral tribunal’s jurisdiction over settlement agreement in absence of express arbitration clause

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