Commercial Court provides guidance on "serious irregularity" and confirms arbitral tribunal has jurisdiction to determine contractual rights and obligations in light of criminal conduct

In the recent decision of Interprods Ltd v De La Rue International Ltd [2014] EWHC 68 (Comm), the English Commercial Court dismissed the challenges under sections 67 and 68 of the Arbitration Act 1996 (the Act) against an arbitral award. In this case, the arbitrator held that the defendant (De La Rue) had been entitled to terminate agency agreements with the claimant (Interprods) and was not obliged to pay outstanding commission to it in circumstances where a representative of Interprods had allegedly stated that such commission would be used to pay bribes.

Interprods challenged the award under: (i) section 67 of the Act on the basis that the arbitrator had lacked jurisdiction to make the award in question; and (ii) section 68 of the Act on the basis that there had been serious irregularities in the making of the award.

Facts

Interprods, a Nigerian company, acted as agent and distributor in Nigeria for De La Rue, a supplier of bank notes, in return for payment of a commission. The parties' relationship was governed by a number of agency agreements.

Clause 25 of the agency agreements provided that "Any dispute arising out of or in connection with this contract, including any question regarding its existence, validity or termination, shall in the first instance be referred to mediation. Should mediation fail, the matter will be referred to and finally resolved by arbitration under the LCIA Rules, which Rules are deemed to be incorporated by reference into this clause."

De La Rue terminated the agency agreements after a meeting at which a representative of Interprods allegedly stated that the commission paid to Interprods would be used to bribe and corrupt Nigerian officials. De La Rue commenced LCIA arbitration proceedings seeking a declaration that it was entitled to terminate the agency agreements and was not obliged to pay any further commission to Interprods. This declaration was granted by the arbitrator in the form of an arbitral award.

Decision

The Court dismissed all of Interprods' challenges to the arbitral award.

(i) Appeal under section 67 of the Act

The Court noted that it was settled law that arbitration clauses should be construed upon the assumption that the parties, as rational business men, were likely to have intended that any dispute arising out of the relationship into which they had entered was to be decided by the same tribunal, unless the language of the arbitration clause made it clear that certain questions were intended to be excluded from the tribunal's jurisdiction.

The Court further noted that parties will often use allegations of illegality in the performance of a contractual obligation when resisting enforcement of a contract. It would seriously restrict the scope of arbitration clauses drafted in terms such as Clause 25 of the agency agreements if allegations of criminal conduct were sufficient to deprive the arbitral tribunal of jurisdiction to determine the contractual rights and obligations in the light of that criminal conduct. In this case, there was no clear wording in Clause 25 of the agency agreements which would thus restrict the jurisdiction of the arbitral tribunal.

(ii) Appeal under section 68 of the Act

Interprods made three allegations of irregularities in the conduct of the arbitration, which concerned: (1) the holding of a conference call in Interprods' absence to fix a date for the hearing of the preliminary issues in the arbitration; (2) the appointment of the arbitrator in two other cases where one of the parties had been represented by De La Rue's solicitors' firm, as disclosed by the arbitrator; and (3) a contention that the arbitrator had not sufficiently questioned the witnesses at the hearing given Interprods' non-participation.

The test of a serious irregularity giving rise to substantial injustice for the purposes of section 68 of the Act involves a high threshold. In relation to the telephone conference, the Court found that this was a "robust but fair decision" and was an exercise of case management in circumstances where Interprods had been invited to attend, but failed to participate. On the second allegation, the Court noted that each appointment of the arbitrator in question had been by the LCIA and not De La Rue's solicitors. The issue to be decided was whether a fair minded and informed observer would conclude that this led to a real possibility of bias in that the arbitrator could have "acquired familiarity" with the firm of solicitors and might have been "unconsciously influenced" by a hope of being appointed by them in other arbitrations. The Court concluded that "only the most suspicious of observers might conclude that there was a possibility of such bias", particularly in the context of the sophisticated London arbitration market.

On the third and final allegation of serious irregularity, the Court considered an arbitrator's duty under section 33 of the Arbitration Act 1996  to “adopt procedures suitable to the circumstances of the case…so as to provide a fair means for the resolution of the matters falling to be determined". The Court also considered the guidance issued by the Chartered Institute of Arbitrators that “if a defending party fails to participate in the proceedings, the tribunal must satisfy itself that the claimant has a case by testing the evidence presented to it". The Court considered the testimony offered and whether questions were appropriate in the circumstances and found the arbitrator's approach did not provide grounds for challenge. The Court also considered whether the arbitrator should have taken into account an undated and unsigned statement by an Interprod's witness in reaching his decision. The Court held that the arbitrator had no obligation to do so and that, even had he done so, there was no evidence that he would have reached a significantly different outcome. On the evidence, the Court therefore found that the arbitrator had not acted unfairly, given the appearance of bias or committed a serious irregularity. The three allegations were accordingly rejected.

Comments

This case provides some interesting guidance on two current issues in international arbitration.

On the first, allegations of bribery, fraud and corruption are not uncommon in arbitration, but the effect of such allegations on questions of validity, jurisdiction and admissibility remains a developing area of law. Interprods argued that the scope of the arbitration agreement extended no further than was necessary to resolve the contractual dispute between the parties arising and that serious allegations of criminal liability and misconduct should not be the subject of arbitration. Adopting the robust and more liberal approach in Fiona Trust,¹ the Court reached the sensible decision that, in the absence of express wording to the contrary, these allegations of criminal misconduct fell to be considered by the arbitral tribunal, not least because they were defences against Interprods' claim for payment of commission.

When agreeing to arbitration provisions, few parties anticipate criminal misconduct as a source of dispute. This case provides reassurance that the English courts' liberal approach to the construction of arbitration clauses should allow parties to raise such claims and defences of illegal activities under a broadly drafted arbitration clause. On the flip side, parties will need to give careful thought to the wording of their arbitration agreement if they wish to exclude certain types of claims and allegations from arbitration whilst maintaining the efficacy of their dispute resolution provisions.

On the question of a section 68 challenge for serious irregularity, the Court provided reassurance that, whilst being mindful of their duties to both parties, sensible and robust case management is still permissible even where one party refuses to participate in the proceedings. The confirmation that institutional appointment of an arbitrator in three matters involving the same firm does not lead to a "real possibility of bias" gives helpful guidance to many firms and their clients when considering possible candidates for arbitrator appointment.

For further information, please contact Matthew Weiniger, Partner, Naomi Lisney, Associate, Vanessa Naish, Professional Support Lawyer, or your usual Herbert Smith Freehills contact.

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¹ Fiona Trust and Holding Corp v Privalov [2007] 4 All ER 951.