'Obvious accounting mistake' sees High Court sink arbitrator's award in rare duty of fairness challenge

Court rules arbitrator inflated award by over $9,000 after mistakenly including unsuccessful counterclaim

In Ducat Maritime Ltd v Lavender Shipmanagement Inc [2022] EWHC 766 (Comm), the English High Court set aside part of an award under section 68(2)(a) of the Arbitration Act on grounds an "obvious accounting mistake" by an arbitrator breached duty of fairness. Contrary to common ground between the parties and without providing an opportunity to comment on a departure from that common ground, the arbitrator had mistakenly included the value of an unsuccessful counterclaim in the award, inflating its value by about 33%, or $9,553.92

The ruling – a rare instance of the High Court intervening on an arbitration award – will give comfort to parties whose arbitration award contains obvious errors but which the arbitrator fails to correct.

Background

The owners and charterers of a vessel entered a charterparty which contained a London Maritime Arbitrators Association arbitration clause. The owners brought an arbitration against the charterers claiming $37,831.83 in respect of an unpaid hire. The charterers denied the claim and sought to set-off and counterclaim $15,070.00 due to the vessel’s underperformance. The set-off and counterclaim were unsuccessful.

Based on the arbitrator’s findings on liability, the owners should have been awarded $28,277.91. However, the arbitrator mistakenly added the value of the charterers’ unsuccessful counterclaim to the value of the owners’ total claim. As a result, the value of the owners’ total claim was held to be $53,692.66. The arbitrator determined they could not award the owners a sum which exceeded the amount claimed and accordingly awarded $37,831.83.

The charterers applied to correct the award under section 57(3) of the Arbitration Act 1996 on two separate occasions. The arbitrator declined to do so both times, on the basis there was “no error or mistake in the calculations”. Against this background, the charterers brought an application before the High Court to set aside part of the award under the Arbitration Act 1996.

Decision

Mr Justice Butcher reiterated the charterers had to show an irregularity falling within the list of categories set out in section 68(2) of the Arbitration Act and that the irregularity has caused or will cause substantial injustice to the applicant. Butcher emphasised the “high hurdle” and “heavy burden”, as outlined in Bandwidth Shipping Corporation v Intaari (The ‘Magdalena Oldendorff’) [2007] 2 CLC 537 at [35] and New Age Alzarooni 2 Ltd and Another v Range Energy Natural Resources Inc [2014] EWHC 4358 (Comm) respectively. As the Departmental Advisory Committee chaired by Lord Justice Saville to advise on arbitration legislation reported, the section was: “really designed as a long stop, only available in extreme cases, where the tribunal has gone so wrong in its conduct of the arbitration that justice calls out for it to be corrected”.

Irregularity

The charterers submitted there was an irregularity falling within section 68(2)(a) on two bases:

• the arbitrator reached a conclusion contrary to the common position of the parties, without providing the parties with an opportunity to address the arbitrator on that issue (contrary to section 33); and
• the arbitrator had made an obvious accounting mistake.

In respect of the charterers’ first submission, Butcher accepted there was “common ground between the parties”, namely, (i) the owners’ total claim amounted to $37,831.83, and (ii) the underperformance claim was the charterers’ counterclaim, not the owners’ claim. By departing from that common ground – for reasons which had not been advanced by either party and without giving them an opportunity to comment – this amounted to an irregularity. Butcher held this represented a failure to comply with the section 33 duty which fell within the closed list of categories set out in section 68(2), specifically section 68(2)(a).

Butcher further held that, when the arbitrator realised the owners’ total claim exceeded the amount the owners had claimed, the arbitrator should have given the parties an opportunity to comment. This was likewise considered a sufficient basis to conclude there was an irregularity within the context of section 68(2)(a).

In respect of the charterers’ second submission that the arbitrator had made “an obvious accounting mistake”, Butcher noted the focus of a section 68 enquiry is whether there has been a failure of due process, not whether the tribunal has reached the correct answer. Moreover, illogicality or irrationality of the tribunal’s reasoning does not in isolation render an arbitral award open to challenge under section 68.

However, Butcher found that a “gross and obvious accounting mistake, or an arithmetical mistake of the 2 + 2 = 5 variety”, may represent a failure to conduct the proceedings fairly. This was not because such mistakes represented an “extreme illogicality”, but instead constituted a departure from the cases put forward by the parties without giving them an opportunity to comment.

Substantial injustice

Butcher had no issues in finding substantial injustice in this case and accordingly granted the charterers’ application to set aside part of the award. By virtue of the arbitrator’s mistake, the charterers were ordered to pay the owners $9,553.92 more than the owners were entitled. Had the charterers been given an opportunity to comment on the arbitrator’s departure from the common ground between the parties, the arbitrator may have reached a different view.

Comment

This decision underlines an “obvious accounting mistake” which the arbitral tribunal refuses to correct can result in a section 68 challenge. The ruling also provides comfort to parties faced with similar deficiencies in awards.

To protect arbitral awards from challenges under section 68 in the future, arbitral tribunals should:

• be vigilant in identifying the common ground between the parties and ensuring they give the parties an opportunity to comment on any proposed departures from that agreed territory;
• diligently engage in any applicable award correction procedure; and
• avoid doubling down on obvious errors, which is an approach which may amount to a failure to conduct the proceedings fairly.

This article originally appeared on our Arbitration Notes blog here.

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