Award following failed settlement withstands section 68 challenge: the High Court confirms that it will intervene only in extreme cases

The recent judgment in Gujarat NRE Coke Limited and Shri Arun Kumar Jagatramka v Coeclerici Asia (Pte) Limited [2013] EWHC 1987 (Comm) confirms that, in a challenge to an arbitral award under section 68 of the Arbitration Act 1996, the English court is unwilling to intervene in a tribunal's decisions except in extreme cases. 

The case highlights the practical advantages of suspending, rather than terminating, arbitration proceedings until all obligations under a settlement agreement have been fulfilled.

Background

Gujarat NRE Coke Limited (NRE) entered into an agreement for the sale of metallurgical coke with Coeclerici Asia (Pte) Limited (Coeclerici) under which Coeclerici made a prepayment of US$10m to NRE.  This sum was repayable in the event that NRE failed to perform its obligations under the contract and repayment was guaranteed by Shri Arun Kumar Jagatramka (the Guarantor) pursuant to a separate contract of guarantee.  Both contracts were governed by English law and provided for LMAA arbitration in London.

Following non-delivery by NRE, Coeclerici claimed repayment.  However, NRE repaid only US$2m.  Coeclerici commenced arbitration proceedings against NRE and the Guarantor for payment of the balance of the prepayment, amongst other things.  A hearing date was set but the parties reached a settlement and entered into a Payment Agreement reflecting the terms of the settlement.  The Payment Agreement provided for certain payments to be made by NRE and the Guarantor to Coeclerici and for the arbitration proceedings to be suspended "from the date of signature of this Payment Agreement and for as long as NRE and the Guarantor continue to perform their obligations hereunder…".  It also provided that if NRE and the Guarantor failed to pay in accordance with the agreement, the settlement would be null and void and Coeclerici would be entitled to resume the suspended arbitration proceedings and/or commence new arbitration proceedings.  In this event, "NRE and the Guarantor expressly and irrevocably agree[d] that Coeclerici will be entitled to an immediate consent award, without the need for any pleadings or hearings", for the payments, reasonable costs and expenses incurred after the date of default and interest from the date of default.

The request for a consent award

NRE and the Guarantor did not pay the settlement sums in accordance with the Payment Agreement and on 4 February 2013, Coeclerici requested that the tribunal make an award in the terms set out in the Payment Agreement.  The tribunal allowed NRE and the Guarantor until close of business on 5 February 2013 to state any reasons why the tribunal should not proceed as requested by Coeclerici.  On 6 February, prompted by Coeclerici, the tribunal stated that it would proceed to make the requested Award.  At this point, NRE and the Guarantor filed very brief submissions arguing that they were not in breach of the Payment Agreement and that they were entitled to a reasonable time to properly develop those submissions.  They argued that the tribunal had no power to proceed to an award until they had been given a reasonable opportunity to do so. 

The issue then, was whether it was appropriate for NRE and the Guarantor to be permitted to serve any submissions over and above those they had already served.  In this regard, they argued that the tribunal could not come to a definitive conclusion that they were in breach of the Payment Agreement without giving them the opportunity to develop the arguments to the contrary.

The tribunal rejected these arguments.  In rejecting the submissions, the tribunal gave weight to the fact that the Payment Agreement was a freestanding agreement made by sophisticated commercial parties.  The tribunal stated that it was not simply an aspect of the arbitration but was rather an ad hoc arrangement, separate from it.  In response to the submission that no definitive conclusion could be reached without allowing an opportunity to further develop NRE and the Guarantor's arguments, the tribunal was clear that it had not simply ignored this argument.  The tribunal took the view, having carefully considered the protests, that if NRE and the Guarantor were allowed additional time to substantiate the reasons why the tribunal should not proceed to the award, the Payment Agreement and surrounding circumstances would still lead the tribunal to conclude that Coeclerici was entitled to the award sought.

The section 68 challenge

The court was referred in particular to s68(2)(a), being "failure by the tribunal to comply with section 33 (general duty of tribunal)".

Section 33(1)(a) is a mandatory provision and provides that the tribunal shall "act fairly and impartially as between the parties, giving each party a reasonable opportunity of putting his case and dealing with that of his opponent".

The parties agreed upon the legal approach to s68(2)(a) summarised by Popplewell J in Terna Bahrain-v-Al Shamsi [2012]EWHC 3283(Comm).  This states that, in order to justify the court's intervention, an applicant must show that there has been a breach of s33, that this amounts to a serious irregularity and also, additionally, that it gives rise to a substantial injustice.

The court held that the tribunal's conduct did not amount to a serious irregularity.  In the decision, the judge noted that the tribunal had not been considering a new case.  NRE and the Guarantor's non-payment came in the context of a previous breach of contract and non-payment, and a second agreement which was made when the parties were facing an imminent arbitration hearing.  In that second agreement they agreed that "Coeclerici will be entitled to an immediate consent award, without the need for any pleadings or hearings" in the event of non-payment.   The court held that "the proper construction of this default provision is obvious and is also informed by the general principles in Section 1 of the [Arbitration Act 1996]".  The "explicit provision to enforce a promise in the event of a further default" did not entitle NRE and the Guarantor to put forward new defences as if they were in the early stages of a legal process, at great further expense and delay.

The judge stated that s33 duties operate in context.  In the light of the agreed terms of the Payment Agreement, the tribunal did give both parties reasonable opportunity to put their case and adopted a suitable procedure.  The court firmly held that, following the approach summarised in Terna, the case was not one which justified the court's intervention.  In fact, the tribunal's approach "was impeccable".

The judgment highlights the court's unwillingness to intervene in an arbitral tribunal's decisions on the basis of a serious irregularity, except in extreme cases.  The tribunal's duty under s33 of the Arbitration Act is not an abstract duty and a tribunal's procedural decisions must be understood in the context within which they are made.

The judgment also highlights the practical advantages of keeping an arbitration alive until the terms of the settlement are fulfilled.  Although reaching a settlement and signing a settlement agreement may feel like the end of the road, there is something to be said for refraining from terminating the arbitration proceedings until all payments and actions required under the settlement agreement have been performed.  Where the arbitration has been terminated, fresh proceedings will be required to enforce the terms of a settlement agreement.  In contrast, where the arbitration has merely been suspended, it can be resumed, permitting a tribunal familiar with the issues to consider the case.  This may minimise the cost and delay of enforcing the settlement agreement and may help to maintain the pressure on the recalcitrant party to perform its obligations.

For more information please contact Nicholas Peacock, Partner or Susan Field, Associate, or your usual Herbert Smith Freehills contact.