A cautionary note for arbitrators and counsel alike: Commercial Court upholds s68 application in part for breach of tribunal's duty to act fairly and impartially

In Brockton Capital LLC v Atlantic-Pacific Capital, Inc., the English Commercial Court upheld a challenge under section 68 of the Arbitration Act 1996 (the Act) for breach by the tribunal of its duty under section 33(1)(a) of the Act to 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.

Brockton's failure to object to new arguments raised in post-hearing submissions and its substantive response to some of those new arguments entitled the tribunal to conclude that Brockton had an opportunity to put its case and deal with that of its opponent. In this respect there was not a breach by the tribunal of section 33(1)(a) of the Act.

However, the challenge succeeded on the basis that the tribunal's award decided an issue that was not pleaded in the post-hearing submissions and on which Brockton did not have notice or opportunity to address. This constituted a breach by the tribunal of section 33(1)(a), which irregularity caused substantial injustice to Brockton and therefore the application under section 68 succeeded.

The case provides guidance to arbitrators on what is necessary to satisfy their duty under section 33(1). It also serves as a reminder to parties and their counsel that there is a distinction between lack of opportunity to respond to an opponent's case and failure to take an opportunity. In the latter case, no breach of section 33(1) will typically arise.

Background

The parties to the arbitration entered into an agreement (the Placement Agreement) under which Atlantic-Pacific Capital, Inc. (APC) was to act as placement agent with a view to raising capital for a Brockton Capital LLC (Brockton) real estate fund. The largest investor in the fund entered into a tripartite agreement with APC and Brockton (the Tripartite Agreement) to ensure that Brockton and APC did not enter into any objectionable practices, including the making of payments designed to induce managers of state funds to invest in funds managed by Brockton.

Brockton purported to terminate the relationship with APC on the grounds that APC had breached certain obligations in the Tripartite Agreement. APC disputed that Brockton had a right to terminate the agreements and disputed Brockton's right to withhold placement fees, commencing ICC arbitration proceedings in London in accordance with the agreements.

The tribunal held a hearing to determine a number of issues including whether APC was in breach of paragraph 2(f) of the Tripartite Agreement and if so, whether Brockton was entitled by paragraph 2(g) to terminate the Placement Agreement. Paragraph 2(g)(i) was concerned with the loss of entitlement to fees and paragraph 2(g)(ii) was concerned with termination.

The post-hearing submissions

At the hearing there was discussion between the tribunal and counsel as to service of post-hearing submissions. The tribunal had in mind simultaneous submissions limited to 25 pages in which the tribunal was looking for "take away" points, the evidence that ought to be considered further in the light of the hearing. The tribunal indicated the issues in which they were particulary interested, but the submissions did not need to be limited to those matters. The tribunal clarified that there would be no new evidence except by leave for good cause and this was included in the procedural order, which confirmed that the hearing was to remain open pending the filing of memorials and cost submissions.

APC's post-hearing submissions (the APC Memorial) included the contention that paragraph 2(g)(i) of the Tripartite Agreement was a penalty and thus unenforceable. Brockton's counsel wrote to the tribunal "reluctantly submitting this letter to ensure that we do not waive any consideration of or objection to APC's new arguments", which it contended were presented for the first time in the APC Memorial. Brockton's letter responded to some of the arguments made in the APC Memorial. APC responded arguing that Brockton's letter was outside the scope of the procedural order and should be disregarded by the tribunal. APC also contested some of Brockton's submissions.

The tribunal confirmed that, whilst no leave was sought nor granted for both parties' letters addressing substantive issues, the tribunal would accept them but no further submissions would be accepted without leave. The tribunal issued a partial final award (the Award) which included a finding that paragraph 2(g) of the Tripartite Agreement was a contractual penalty that was unenforceable under New York law.

The section 68 application

Brockton issued an application to challenge the Award. The tribunal refused to suspend the reference pending the determination of the challenge on the basis that: it was understood that new arguments could or would be made in the post-hearing submissions; Brockton did not actually object to the arguments in the APC Memorial, but instead responded to them; and, the tribunal had considered the parties' post-hearing memorials as well as the correspondence in its deliberations.

Breach of section 33(1) – the Commercial Court's judgment

Mr. Justice Field emphasised the high hurdle posed by section 68 before distinguishing between a situation where one party has had no opportunity to address his opponent's case (where a breach of section 33(1) will exist) and one where the party has failed to recognise or take an opportunity which exists (where there will be no breach of section 33(1)). Section 33 must be approached by reference to the conduct of the tribunal. If the tribunal was entitled to conclude that a party had appreciated that a new submission had been advanced by the other party but not addressed it, the tribunal will not be in breach of the duty if it proceeds to decide the issue on the basis of the new submission.

He concluded that Brockton did have an opportunity to make submissions responsive to APC's pleaded new penalty clause case when it wrote to the tribunal and the tribunal would have been entitled to conclude that it did not take that opportunity. This was because Brockton:

1. did not clearly state that it was objecting to admission of a new case or ask for a ruling on the objection, but instead merely reserved its position against the possibility that it might decide at some future time to allege misconduct on the part of the tribunal;
2. made submissions in respect of certain of APC's new arguments in respect of which it was reserving its position; and
3. did not seek leave to make submissions and its failure to do so would have reinforced, in the judge's opinion, the tribunal's conclusion that Brockton had not opted to address APC's new penalty clause case.

However, Mr. Justice Field found that APC's new penalty clause case, as pleaded in the APC Memorial, was directed towards the question of whether paragraph 2(g)(i) of the Tripartite Agreement was unenforceable on penalty grounds, and not paragraph 2(g)(ii). The tribunal was therefore not entitled to conclude that Brockton had notice of any penalty clause issue going to paragraph 2(g)(ii), or that Brockton had knowingly passed up an opportunity to deal with that issue. In deciding that paragraph 2(g)(ii) was an unenforceable penalty under New York law, the tribunal dealt with an issue of which Brockton had had no notice and no opportunity to respond, and in so doing the tribunal breached section 33(1)(a). This caused a substantial injustice to Brockton and the challenge under section 68 was upheld.  

Comment

The discussion in this case between tribunal and counsel as to the nature of the post-hearing submissions expected or anticipated by the tribunal is not unusual.   Tribunals – as the tribunal in this case appeared to do – often seek to achieve a balance between steering the parties' counsel towards succinct submissions which focus on questions or issues which the tribunal regards as key to deciding the case, whilst allowing the parties to put their cases as they see fit without any degree of prejudgment of the issues. The tribunal's procedural approach here, in allowing submissions on a new argument in the post-hearing stages, was to some degree vindicated as it was not the procedural approach in itself which led to a finding of a breach of section 33(1). However, there is still some risk in this approach and the judgment demonstrates that a tribunal can fall foul of section 33 by dealing with a dispute on a point which has not been argued, without having given notice to the parties to enable them to address it.

The case strikes a cautionary note for counsel faced with new arguments at a late stage in arbitral proceedings. Again, the approach taken by Brockton's counsel of reserving the right to object whilst responding to the new arguments is not unusual. Whilst counsel may feel they cannot let new arguments go unanswered, it is clear that counsel need to unequivocally object to the right for the new case to be made. Failure to take the opportunity to do so will undermine any section 68 application based on section 33(1), notwithstanding any reservation of the right to object.

Further, when responding in substance to new arguments whilst objecting to the opposition's right to make them, counsel must do so comprehensively, responding to every new argument made with the same vigour and detail as per previous substantive submissions.   In this case, counsel's reservation coupled with a substantive response to some, but not all, of the new arguments left it open to the tribunal to conclude that Brockton had decided not to avail itself of the opportunity to respond to all of them.

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