Challenges to an LCIA award on grounds of serious irregularity and substantive jurisdiction dismissed by the English Court

In C v D [2016] EWHC 1893 (Comm), the Commercial Court (the Court) dismissed an attempt to set aside an LCIA Award.  The claimants brought challenges to a partial award on the grounds of substantive jurisdiction (s67 of the Arbitration Act 1996 (AA 1996)) and serious irregularity (s68 AA 1996).  Both challenges were squarely rejected by the Court.  Click here for a copy of the judgment.

Background

The arbitration, seated in London and administered under the 1998 LCIA Rules, was between three claimants (C1, C2 and C3) and one Defendant (D).  C1 and C3 had entered into a Production Sharing Agreement (the PSC) with D in respect of Nigerian offshore oil mining blocks.  D then agreed to sell its interest in the blocks and the PSC to C1 via a Sale and Purchase Agreement (the SPA).  C2, as ultimate parent of C1 and C3, agreed to guarantee C1 and C3's payment obligations under the SPA to D. 

Disputes arose in respect of two of these guarantees, namely the "Adjustments Guarantee" and the "Deferred Payments Guarantee".  A tribunal consisting of Thomas Webster, Professor Julian Lew QC and Lord Hoffmann rendered a Second Partial Award dated 23 September 2015 (the Award).  The Claimants challenged the Award in the English Courts.

Challenge on the grounds of serious irregularity

The Claimants challenged the tribunal's decision that D's written demands on C2 under the Adjustments Guarantee were valid, as well as its order for associated relief, on the grounds of serious irregularity (s68 AA 1996). 

Under the SPA, the mechanism for triggering the Adjustments Guarantee required D to serve an Adjustments Statement on C1, detailing any adjustments to the consideration due under the SPA.  If C1 disagreed with the amount stated, it would serve a Dispute Notice on D, and the dispute would be resolved in accordance with the procedure set out in the SPA.  The Adjustments Guarantee provided that, if D issued issue a written demand to C2 stating that, in D's opinion, C1 had failed to comply with its payment obligations under the SPA, C2 would be obliged to pay the outstanding sum to D immediately. 

D served an Adjustments Statement on C1 and C1 retorted with a Dispute Notice.  D also issued a written demand to C2 for the amounts due as stated in the Adjustments Statement (the Demand). Neither party triggered the dispute resolution process in the SPA.

In the arbitration, C2 contended that the opinion contained in the Demand could not have been honestly-held, since D had received a valid Dispute Notice disagreeing with the amount stated in the Adjustments Statement, and the dispute resolution procedure in the SPA had not been followed.  C2 argued that this consequently invalidated the Demand.

The tribunal proceeded on the basis of certain assumptions (which it termed the "Interim Assumptions") that the Dispute Notice was valid and the Adjustments Statement was not, and asked itself whether, in these circumstances, the Demand could still be valid.  The tribunal concluded that it could, and went on to hold that there was nothing on the facts or evidence to suggest that D's opinion was in bad faith.  As such, it found that C2 was liable to D for the sums stated in the Demand. 

In support of its s68 challenge, the claimants argued that the tribunal failed to apply the Interim Assumptions when considering the question whether the Demand was made fraudulently or in bad faith, and to deal with the issue of bad faith at the time the Demand was made.  They also argued that the tribunal failed to deal with all of the issues that were put to it.  The Court rejected all of these criticisms.  In respect of the tribunal's failure to deal with certain issues, it reminded the parties that sometimes a tribunal's conclusion on one or more issues between particular parties has the result that other issues do not affect the outcome of the reference and therefore do not in the event arise between those parties.

The Claimants also criticised the tribunal for serious procedural irregularity, including that the tribunal was in breach of its duty under s33 of the AA 1996 to act fairly and impartially between the parties (which amounts to serious irregularity by virtue of s68(2)(a) AA 1996).  As with the Claimants' substantive points, the Court found no merit in these challenges.

Challenge on the grounds of substantive jurisdiction

The SPA and Guarantee did not provide expressly that disputes arising under them could be resolved in a single arbitration proceeding, or for the consolidation of arbitrations arising under each agreement.   The Claimants argued that the tribunal did not have jurisdiction over D's claims under the Deferred Payments Guarantee because there was no dispute in respect of the Deferred Payments Guarantee before the Request for Arbitration was filed and that C2 (the party to the Deferred Payments Guarantee) did not subsequent submit to the jurisdiction of the tribunal. 

The Court found that these contentions were "wholly without merit". Mr Justice Knowles held that the evidence pointed to the fact that there was a dispute in respect of the Deferred Payments Guarantee before the Request for Arbitration, and that C1 and C2 had expressly recognised and accepted this in their Response.  He noted that C1 and C2 had jointly submitted a counter declaration that D was not entitled to make demands pursuant to the Deferred Payments Guarantee, had indicated in the Response that the Deferred Payments Guarantee was within the scope of the proceedings, and also had expressly accepted that "the tribunal should exercise jurisdiction over the Respondents in these proceedings".  On this basis, he dismissed the Claimants' challenge on substantive jurisdiction.

Comment

It is notoriously difficult to succeed in a challenge to an arbitral award in a London seated arbitration on grounds of procedural irregularity.  While the judgment provides only limited insight into the workings of this particular arbitration, the court's decision illustrates the high burden facing any attempt to challenge an arbitral award under s68.

On the jurisdictional challenge, while it was not ultimately critical, this case provides a reminder of the importance in situations like this of including consent to resolution of disputes in a single arbitration and consolidation in all the relevant contracts.  In any multi-party or multi-contract transaction, it is important to consider how disputes arising under more than one of them will be dealt with.  Ultimately, the inclusion of consolidation and joinder provisions can avoid wasted time and costs incurred as a result of prolonged proceedings, and remove the possibility of subsequent potential challenges as to jurisdiction over the various claims.

For further information, please contact Chris Parker, Partner, Natalie Yarrow, Associate, or your usual Herbert Smith Freehills contact.