Finality of partial awards: English court finds that applicant loses the right to object to jurisdiction by failing to challenge a partial award

In Emirates Trading Agency LLC v Sociedade de Fomento Industrial Private Limited [2015] EWHC 1452 (Comm), the English High Court (the Court) dismissed an application under section 67 of the English Arbitration Act 1996 (the Act) to set aside an ICC award on grounds of lack of substantive jurisdiction.

The tribunal had made a partial award on jurisdiction (the Jurisdiction Award), which the applicant in the present case (the Buyer) had not challenged under the Act at the time. The tribunal was then reconstituted as the majority of arbitrators had to be replaced. The Buyer sought to challenge the award on the merits (the Final Award) issued by the reconstituted tribunal, on the ground (inter alia) that it lacked substantive jurisdiction. The Court found that as the Jurisdiction Award had not been challenged within the relevant time, it had become final and created an issue estoppel between the parties. In accordance with section 73(2) of the Act, this barred the Buyer from raising an objection to jurisdiction later.

This case reminds parties that all awards which are final as to the issues they determine - including partial awards issued under s47 of the Act - must be challenged in a timely manner under ss67 to 69 of the Act to avoid losing the ability to challenge the award.

It also demonstrates that additional time and costs can be incurred when parties do not draft their dispute resolution provisions in a clear and unambiguous manner, leaving scope for jurisdictional challenge. Further information about best practice for drafting escalation clauses can be found in our podcast here.

Interestingly, the Court also left open the possibility that difficulties in relation to the future enforcement of an award (in this case, said to arise because the tribunal was reconstituted before the Final Award was issued) could found a challenge under s68, although there was no decision on this point.

FACTS

The Buyer had agreed to purchase iron ore from the defendant (the Seller) under a five year contract (the Contract), with a minimum amount to be lifted each month by the Buyer, and a clause for liquidated damages to be payable in the event of failure to supply or take delivery of the agreed quantity. The Contract provided for termination in the event of a substantial breach of contract. The Contract also provided that the parties should seek to resolve any claim or dispute by friendly discussions for a continuous period of three months before invoking the arbitration clause, which provided for ICC arbitration seated in London.

In the second shipment year, the Buyer failed to lift the required contractual quantity and after May 2008 it failed to lift any further quantities. On 17 November 2009, the Seller served a notice of termination (the Notice) including a claim for liquidated damages in the region of $17.8 million. On 15 June 2010, the Seller commenced arbitration proceedings. The Buyer challenged the tribunal's jurisdiction, arguing that the Seller had failed to comply with the three month friendly discussions clause, which it argued was a condition precedent to the right to commence arbitration proceedings.

In its Jurisdiction Award, the tribunal dismissed the Buyer's challenge, determining on the facts that it had jurisdiction: meetings and discussions had occurred between the parties both before and after the Notice was served, in particular covering a possible settlement of the claim, which had not been achieved within three months. It also found that the friendly discussions provision was too uncertain to be enforceable at law. The Buyer did not seek to challenge the Jurisdiction Award within the 28 day time limit imposed by s70(3) of the Act (or at all).

After the Jurisdiction Award was issued, two of the arbitrators resigned and were replaced. In accordance with Article 12(4) of the ICC Rules 1998 (which were the ICC Rules in force at the time the arbitration was started), the reconstituted tribunal invited the parties to make submissions as to whether any of the prior proceedings should be repeated. The Buyer sought to have a fresh hearing on its jurisdictional challenge. On 26 June 2013, the tribunal declined to repeat any earlier proceedings on the grounds that no issues had been alleged by the Buyer which concerned the independence of the arbitrators who had produced the Jurisdiction Award or the substantive correctness of the Jurisdiction Award, and that the Buyer had not challenged the Jurisdiction Award under the Act.

The Final Award was issued on 2 September 2014 and the Seller's claim succeeded in full. In the Final Award, the tribunal rejected the Buyer's argument that the Seller had failed to comply with the friendly discussions clause as: (a) in so far as it was a jurisdictional objection, it raised no new grounds and had already been dealt with and rejected by the tribunal in the Jurisdiction Award; and (b) in so far as it was a matter of construction of the clause as a condition precedent to the termination of the Contract, the tribunal rejected such a construction.

The Buyer challenged the Final Award under s67 of the Act on the basis that the tribunal lacked substantive jurisdiction, raising the same grounds as were advanced to the tribunal and rejected in the Jurisdiction Award – namely that the "friendly discussions" clause was a condition precedent to the right to arbitrate and that failure to comply deprived the tribunal of jurisdiction. It also challenged the Final Award under s68.

Implications of failure to challenge the Jurisdiction Award

The Court first addressed whether the failure to challenge the Jurisdiction Award precluded the s67 application. The Jurisdiction Award was final and binding on the parties in accordance with s58 of the Act, which applied equally to partial awards made under s47 as it did to final awards. The Court said the status of a partial award was more accurately described as an "interim final award", which was final as to what it decided but left the tribunal free to decide other matters in respect of which it was still seised. In addition, Article 28 of the ICC Rules provided that "every award" is binding on the parties. The consequences of the binding nature of the award were that:

• if no application to challenge the award was made under the Act within the time limit it prescribes (or a challenge was made and rejected), the Jurisdiction Award became final and created an issue estoppel between the parties. Where the partial award deals with jurisdiction the position was reinforced by s73(2) of the Act which prevents a party from objecting to jurisdiction on a ground which was the subject of a ruling on jurisdiction that the party did not question in accordance with the relevant arbitral process or challenge within the time allowed; and
• the tribunal was then functus officio as to that matter, meaning that it no longer had the power to review the subject matter of the Jurisdiction Award (unless the matter was remitted to it following a successful challenge of the award by way of application to the court under the Act).

Therefore, it was not open to the Buyer to challenge the Final Award under s67 as the issue had been decided against it in the Jurisdiction Award, in respect of which it had made no challenge under the Act.

Challenge to a further decision on jurisdiction in the Final Award?

The Court rejected the argument that the reconstituted tribunal had reached a further decision on jurisdiction in the Final Award, and it was this decision which was the subject of the s67 application. The decision of the reconstituted tribunal in the Final Award was that the issue of the challenge to jurisdiction had already been decided. It did not decide on the merits of the jurisdiction objection and the reconstituted tribunal only adopted the findings in the Jurisdiction Award for the purpose of dealing with the substantive argument that the friendly discussions clause was a condition precedent to termination of the Contract. Further, the tribunal's decision that it was bound by the Jurisdiction Award meant that it was not open to it to revisit the question of jurisdiction on the same grounds of objection which had already been advanced and rejected.

Arguments against issue estoppel rejected by the Court

The Court also rejected the argument that the functus doctrine was displaced by Article 12(4) of the ICC Rules which prevented issue estoppel arising as the decision was not final if it could be reopened by the reconstituted Tribunal. In rejecting this argument, the Court said that the power conferred by Article 12(4), also found in s27 of the Act, was a discretionary one to repeat part of the proceedings and only exercisable for the purpose of deciding matters remaining to be determined in the reference. The Court clarified that it did not enable a reconstituted tribunal to review or change a decision on an issue which was final and binding as to the matters it decided.

The Court also rejected the argument that no issue estoppel could have been created because the majority of the reconstituted Tribunal making the Final Award were not party to the Jurisdiction Award, commenting that the tribunal is an institution which remains a single entity throughout the course of the reference. The arbitrators from time to time are the individuals who constitute it, but any newly constituted tribunal is still the same arbitral tribunal as before.

The scope of s73 of the Act (Loss of right to object)

On behalf of the Buyer it was argued that it had made the relevant challenges required to be made by a party under s73 of the Act by (a) seeking a review of the Jurisdiction Award under Article 12(4) of the ICC Rules, and (b) challenging the Jurisdiction Award at the merits hearing. Therefore, the Buyer argued, the s67 application was not precluded.

This was rejected by the Court: the only way that the Buyer could have challenged the Jurisdiction Award in a way which satisfied s73 was by way of an application under ss67 to 69 of the Act.

The Buyer's challenges to the Final Award under s68 of the Act (Serious Irregularity)

The Court also rejected an application under ss68(2)(f) and (h) of the Act. The s68(2)(h) application, on the ground of failure to comply with requirements as to form, was dismissed immediately as not applicable. The s68(2)(f) application, on the ground of uncertainty or ambiguity as to the effect of the award, was made on the basis that in the UAE (which was accepted as the only jurisdiction in which there were assets against which the Final Award could be enforced), enforcement may present a difficulty because the majority of the tribunal which issued the Jurisdiction Award differed in constitution from the majority giving the Final Award. Assuming (but not deciding) that considerations of enforceability would engage s68(2)(f), the Court held the application still failed because there was no serious irregularity or substantial injustice to the applicant (i.e. the Buyer) in such a case.

Comment

This case provides a reminder to parties to a London-seated arbitration that final awards (including partial awards issued under s47 of the Act) must be challenged in a timely way under ss67 to 69 of the Act to avoid losing the opportunity to challenge the award. A failure to challenge an award within the prescribed time limit will lead to the award becoming final and binding, creating an issue estoppel and preventing a party from raising the same challenge later.

Article 12(4) of the ICC Rules 1998 (now found in Article 15(4) of the ICC Rules 2012 and also the subject of s28 of the Act), was interpreted restrictively, only allowing a reconstituted tribunal to repeat prior proceedings for the purposes of deciding the issues left to be determined in the reference. It was not within a reconstituted tribunal's power to re-consider and decide matters which had already been finally determined in a partial award which had not been challenged and thus had become binding.

Both conclusions about the finality of partial awards are sensible and welcome. As the Court stated, "any other conclusion would be contrary to the scheme of speedy finality inherent in the 1996 Act and in international arbitration".

On a practical note, the case also demonstrates that additional time and costs can be incurred in resolving a substantive dispute if the parties do not draft dispute resolution provisions in a clear and unambiguous manner. In this case, the parties disputed whether the escalation provision which referred to "friendly discussions" was a condition precedent to arbitration.

For further information, please contact Craig Tevendale, Partner or Hannah Ambrose, Professional Support Consultant, or your usual Herbert Smith Freehills contact.