UK Supreme Court rules on section 69 challenge to an arbitral award: do the courts plan to take a more active role in arbitration?

On 11 May 2016 the Supreme Court handed down a ruling on a challenge to an arbitral award on a point of law, under section 69 of the Arbitration Act 1996. The decision in NYK Bulkship (Atlantic) NV v Cargill International SA [2016] UKSC 20 arose from an arbitral award dated 7 February 2012 ("the Award") relating to the interpretation of an off-hire charterparty clause and raised an important legal question about agency. A decision of the Supreme Court on a challenge to an award is a relatively rare and significant occurrence, and this one comes at a time when the relationship between the English courts and arbitration is the subject of ongoing debate. The case also serves to demonstrate the bar that must be cleared for the court to intervene under section 69.

Background to the Award

The circumstances giving rise to the arbitration claim which resulted in the Award concerned a series of shipping transactions. In brief, ship-owners NYK Bulkship ("NYK") chartered a vessel to Cargill International ("Cargill") in 2008 which was due to carry cement from Sweden to Nigeria. The charterparty contained an off-hire clause which set out that payment for hire of the vessel would be suspended should the ship be captured, seized, detained or arrested. However if these circumstances arose due to "any personal act or omission or default of [Cargill] or their agents", NYK would be reimbursed for any expenses incurred.

Due to a dispute between the buyer and seller of the cement on board the vessel, the ship was mistakenly arrested and costs were incurred. The question that arose was whether the buyer and/or seller of the cement could be considered to be Cargill's agents and, if so, whether the vessel was off-hire during its arrest. Lord Sumption in the Supreme Court noted that the contractual interpretation considerations raised in the case had "wider implications of some importance".

Section 69: right to appeal on a point of law

The only two grounds to challenge an award which cannot be waived in an English-seated arbitration are those of substantive jurisdiction or serious irregularity. The right to appeal an award on a point of law is not a mandatory provision of the English Arbitration Act 1996. This means that the parties to an arbitration agreement may agree to exclude this right to appeal (and they frequently do - for example, the ICC and LCIA Rules serve to waive this right). This arbitration was conducted pursuant to the LMAA (London Maritime Arbitrators Association) Terms which do not exclude section 69.

Where this right to appeal on a point of law has not been excluded, an appeal can be brought under section 69 only with the agreement of the parties to the dispute or with the permission of the court.

Under section 69(3), the court can only grant permission if (a) the determination of the point of law will substantially affect the rights of one or more parties, (b) the question is one which the tribunal was asked to answer, (c) the arbitral award is obviously wrong or else the decision is open to serious doubt and concerns a question of general public importance, and (e) it is just and proper for the court to rule on this issue despite the parties agreeing to resolve the dispute by arbitration.

It is then at the court's discretion to confirm, vary or set aside the award or else to remit it to the tribunal in whole or in part for reconsideration in the light of their ruling. However, the statute provides that the court shall not exercise its power to set aside an award unless it is satisfied that it would be inappropriate to remit the award to the tribunal for reconsideration.

The Challenge Proceedings

Section 69 challenges are rare and, where made, are usually unsuccessful. Where unsuccessful, it is unusual to obtain permission to appeal the decision of the first instance court of that Section 69 challenge. This case is particularly unusual as an example of a Section 69 challenge going all the way to the Supreme Court.

In this case, the question of law was whether the arrest of the ship had been caused by the buyer and/or seller of cement as Cargill’s “agents” within the meaning of the proviso. The courts had differing views on this.

NYK brought the initial appeal and Field J’s construction of the off-hire clause was that Cargill were responsible for any “act or omission or default in the course of the performance by the delegate of a delegated task”. On this interpretation, the cement buyer’s failure to discharge the cement from the ship within the contractually agreed time meant the ship was on hire during its arrest and due to the actions of its agent (the cement buyer), Cargill was liable for subsequent losses.

Field J remitted the Award to the tribunal for reconsideration on points of causation. However, he also allowed Cargill and NYK's appeal and cross-appeal to the Court of Appeal.

Gross LJ came to the same conclusion as Field J but adopted a very different legal approach.  On his reading of the off-hire clause, “agent” required the court to look at the parties’ spheres of responsibility.  NYK was responsible for the management of the ship and its crew, whereas Cargill managed trading agreements for the use of the ship. As such, the cement dispute and subsequent losses lay with Cargill. Again, the Court of Appeal remitted the Award to the tribunal.

Permission to proceed with an appeal on the question of the construction of the term "agent" was then granted by the Supreme Court on the basis that this was an arguable point of law of general public importance. Lord Sumption explained that “agents” as mentioned in the off-hire clause did not hold the strict legal meaning often associated with the word. Rather, it referred to persons who took on Cargill’s rights and obligations. Furthermore, their every action would not be that of an agent. In order to qualify, such actions needed to relate to a right or obligation of Cargill.  In failing to discharge the cement from the ship, the cement buyer was not exercising any of Cargill’s rights or obligations. As such, they did not constitute an “agent” within the meaning of the off-hire clause, and payment for hire was rightly withheld for the arrest period. The Supreme Court set aside the orders of both courts below and upheld the Award given by the original tribunal.

Comments

While the case is of considerable substantive importance in the context of shipping law, its significance in arbitration arises from its illustration of how the section 69 procedure can and should work in the rare circumstances when an appeal to an English-seated arbitral award on a point of law is permitted. The decision is also timely as it has been handed down in the midst of ongoing debate over the role and impact of arbitration in the development of English law. In a widely reported lecture held by the Trustees of the British and Irish Legal Information Institute (BAILII) on 9 March 2016, the Lord Chief Justice, Lord Thomas suggested that the increased popularity of arbitration as a preferred method of dispute resolution had led to “a serious impediment to the development of the common law by the courts in the UK, particularly … the Commercial Courts in London”.  The reasoning behind this was that the privacy of arbitrations stopped important legal decisions being made publicly available and from being used to test and develop the common law. Lord Thomas recommended the reformulation of section 69 of the Arbitration Act 1996 to allow for a broader right of appeal on points of law so these issues could become part of the public body of knowledge.

This has prompted something of a backlash from arbitration practitioners, including former English judges. Amongst others, both Lord Saville and Sir Bernard Eder have since taken issue with Lord Thomas' views and have argued that international disputing parties should not “be obliged to finance the development of English Commercial law”.

This case underlines the important role which section 69 may play for parties that choose not to exclude the provision. Both parties in this case initiated and continued the appeals process through to the Supreme Court, and clearly found the clarification of the term in question to be hugely important to them. It is also of value to other participants in the wider shipping industry. As would be expected of a jurisdiction known for being "arbitration friendly", at each stage in the appeal process, the English courts restricted themselves to the specific points of law raised. At every level of the appeal, the courts also respected the parties' choice to arbitrate by remitting the Award back to the original tribunal having clarified the point of law. The final outcome after the parties had recourse to three courts to challenge the Award was that the tribunal's original award was upheld - a result which would doubtless have been received with interest by the tribunal.

For further information, please contact Craig Tevendale, Partner, Vanessa Naish, Professional Support Consultant, Laura Paliani, Associate or your usual Herbert Smith Freehills contact.