Ambit of Challenge to Arbitration Award

October 1, 2010

ARBITRATION GROUP

Ambit of Challenge to Arbitration Award

for failure to apply law chosen by the parties

On 16 July 2010 the decision of Mr Justice Tomlinson (as he then was) in B -v- A [2010] EWHC 1626 (Comm) was handed down. The case was the hearing of a preliminary issue concerning the ambit of a permissible challenge to the validity of an arbitration award, under sections 67 and 68 of the Arbitration Act 1996, “the Act”, where the lack of jurisdiction or serious irregularity is alleged to have arisen in consequence of the arbitral tribunal having failed to decide the dispute in accordance with the law chosen by the parties as applicable to the substance of the dispute, as required by section 46 of the Act.

Factual Background

A, B and C were all Spanish companies. B owned all of the share capital of C. B was a manufacturing company. C was involved in the development, manufacture and marketing of equipment for computer-aided design and computer-aided manufacturing. The group of companies of which A was a part was in the same business as C. By a Share Purchase Agreement (“SPA”) A sold its interest in C to B for approximately €50 million. The transaction was governed by Spanish law but contained an arbitration clause providing for ICC arbitration in London.

B brought arbitration proceedings for breach of warranties in the SPA claiming sums in excess of the amount paid for the company. The Tribunal, by a majority, awarded B approximately €15 million. In a strongly worded Dissenting Opinion, the only Spanish lawyer on the Tribunal asserted that the majority had strayed far beyond the boundaries of Spanish law in making their award.

A sought to challenge the award in the English courts. It was recognised by the parties that there were certain threshold issues to such a challenge and a broad preliminary issue was ordered to be heard, namely,does the material relied upon by the Claimant disclose a case with a realistic prospect of success for the challenge of the Final Award of the majority of the arbitrators in ICC Arbitration No. 13912/EC/ND under section 67 and/or 68 of the Arbitration Act 1996?

Tomlinson J’s Decision

The principal features of Tomlinson J’s decision may be summarised as follows:

• A dissenting opinion might be admissible as evidence in relation to procedural matters, as where for example it is alleged that some aspect of the procedures adopted in the arbitration worked unfairly to the disadvantage of one party. Where the proper law of the dispute is English law and there is an appeal on a point of law, the views of a dissenting arbitrator might well inform the decision of the court. In the instant case however the judge found it difficult to ascribe any formal status to the Dissenting Opinion. In so far as it expressed conclusions of Spanish law which went beyond any evidence as to the content of that law given at the arbitration, he did not see how he could have regard to it. Ultimately he found that the Dissenting Opinion amounted at best to inadmissible opinion evidence as to the process of reasoning adopted by the majority arbitrators and he doubted if he could properly have regard to it, let alone accord it any weight.

• The judge rejected A’s submission that it was in each case a matter of fact and degree whether a departure by a tribunal from the law chosen by the parties as applicable to the substance of the dispute in breach of section 46 of the Act amounted to an excess of jurisdiction under section 67 or serious irregularity under section 68 of the Act. He stated he could not accept “the integrity, utility or practicality of the suggested dividing line dependent upon the gravity of the error in application of the law”. In his judgment “for a challenge of this sort to have any prospect of success, a conscious disregard of the provisions of the chosen law is a necessary but not a sufficient requirement”.

• A challenge under section 67 cannot be made because an error in the application of the chosen law does not involve a lack of substantive jurisdiction as defined in sections 30 and 82 the Act. If demonstrated, a breach of section 46 can be addressed only under section 68(2)(b). However (following the Lesotho Highlands Case), an error as to the application of the applicable law can involve no excess of power under section 68(2)(b).

• In the absence of an allegation of impropriety against the majority of the Tribunal the challenge could not succeed.

Comment

This is an important decision as stated by the judge when giving his judgment in public albeit anonymised form. The outcome will come as no surprise to anyone and reinforces the “hands-off” policy of the English courts. It is clear that policy was a strong motivation – during the course of argument the judge observed that if he allowed the challenge it would open the gates for challenges to every award made in London under a law other than English law.

The judge was undoubtedly correct that a challenge for departure from the chosen law of the parties in breach of section 46 of the Act cannot be made under section 67 as a matter of statutory construction.

In other respects it may be said that the decision was disappointing and constituted a lost opportunity. A argued that section 46 meant that the law chosen by the parties could not rationally be described as “fact” – the instant case was the sale of a Spanish company by one Spanish company to another Spanish company under a Spanish law contract, merely by choosing to resolve any disputes in England cannot, it was submitted, seriously be said to transform the chosen and domestic law of the parties and the transaction to simple “fact”. The judge failed to address this argument and instead drew a distinction between dissenting opinions in cases where English law was the substantive law and where it was not that meant that the Dissenting Opinion could not “inform” his decision. The distinction appeared to accept sub silentio that “foreign” law in international arbitration is fact.

The suggestion that a conscious disregard of the provisions of the chosen law is a necessary but not a sufficient requirement is confusing. It is suggested that any disregard of the chosen law will be conscious as it involves an element of choice. The judge did not say that impropriety was a necessary requirement albeit that he held the challenge failed in the absence of such an allegation. The judge did not in fact formulate a workable test and the decision leaves open the question of what other requirements in addition to a conscious disregard of the provisions of the chosen law are necessary.

While the judge recognised that this was a case of some public importance he declined to give permission to appeal to the Court of Appeal and so the open questions will have await appellate clarification on another occasion.

Michael Black QC was instructed by SC Andrew on behalf of the Claimant