English Commercial Court upholds s68 serious irregularity challenges to an arbitral award holding that the arbitrator should have ensured that costs are pleaded by all parties

In Oldham v. QBE Insurance (Europe) Ltd [2017] EWHC 3045 (Comm), the Commercial Court held that the arbitrator's decisions on costs could be challenged on grounds of serious irregularity under Section 68 of the Arbitration Act of 1996 (the Act) on the basis that the applicant had been denied the opportunity to make submissions. This decision is a rare instance of the English Courts intervening in the conduct of an arbitration in order to protect the integrity of the process, and ensure equal treatment of parties to the arbitration.

Background

The Applicant (Mr O) faced civil liability proceedings in the High Court as a result of his actions as joint administrator in a company's liquidation (the Underlying Claim). The Underlying Claim prompted a dispute between Mr O and his professional indemnity insurer (QBE) in relation to the scope of his coverage. The dispute between Mr O and QBE was submitted to arbitration before a sole arbitrator pursuant to the insurance policy (the Arbitration).

The Awards

The arbitrator issued two awards in favour of QBE. In the first award (Part I Award), the arbitrator held that Mr O's defence costs for the Underlying Claim were not covered by the policy and that QBE should therefore be reimbursed all defence costs paid in relation to the Underlying Claim. Whilst the parties had not made any submissions on which party should bear the costs of the Arbitration, the arbitrator also found Mr O liable for the costs of the arbitration, which were to be quantified in a subsequent award.

The arbitrator then invited QBE to file submissions on costs, following which Mr O was given a deadline to respond. The deadline was subsequently extended twice. Before this deadline was reached the arbitrator issued his second award (Part II Award) in which he quantified the total amount of costs to be paid by Mr O and ordered that a payment on account of costs be made within 28 days.

The Challenges to the Award

Mr O sought to challenge both the Part I and Part II Awards under s68 and s69 of the Act before the Commercial Court (the Court). Section 68 provides for challenge of an award where there has been a serious irregularity that has caused or may cause a substantial injustice, whereas s69 permits (in limited circumstances) challenge on grounds of an error of law.

Section 68

While it noted the "deliberately high" nature of the threshold test for a challenge under s68(2) of the Act (relating to a breach of the tribunal's duty to act fairly and impartially between the parties under s33 of the Act), the Court upheld the s68 challenges.

The costs of the arbitration

The duty of the arbitrator under s33 included giving each party the possibility to address the issue of costs. The Court found that Mr O had been deprived of any fair opportunity to advance his arguments on which party should bear the costs since the arbitrator had issued his decision before Mr O was able to present his arguments on costs. There was therefore a breach of the arbitrator's duty under s33. This breach amounted to a serious irregularity, especially in the context of Mr O acting as a litigant in person who claimed financial difficulties. This serious irregularity had caused a substantial injustice to Mr O as his arguments "might have well been accepted" by the arbitrator had he been given opportunity to advance them. Consequently the Court upheld the s68(2) challenge.

Payment on account of costs

Similarly, the Court found that the arbitrator's order for payment on account of costs gave rise to a serious irregularity causing a substantial injustice to Mr O. By issuing the decision before the deadline for Mr O to make his submissions, the arbitrator had deprived Mr O of the opportunity to address this point, so breaching his duty under s33.  The Court held that this this breach was a serious irregularity which caused Mr O a substantial injustice because the arbitrator might well have made a different order both as to timing and as to amount of such payment had Mr O been given an opportunity to address this point. The Court was again sensitive to the fact that Mr O was a litigant in person who claimed financial difficulties, at least pending resolution of the Underlying Claim, but also to the fact that the arbitrator had awarded costs claimed by QBE which it had incurred prior to the arbitration.

Further, the Court allowed Mr O a retroactive extension of time, so curing the fact that he had made his s68 challenges after expiry of the 28-day time limit provided for in the Act (s70(3)). The Court considered a number of relevant factors in granting this extension, finding in this case that the strength of the s68 applications on their merits proved decisive.

Section 69

The Court rejected Mr O's challenge under s69 of the Act, finding (although for different reasons), that the arbitrator had not erred as a matter of law in interpreting the policy as requiring Mr O to reimburse QBE for the defence costs paid in relation to the Underlying Claim.

Comment

This is a significant decision due to the Court's clarification that the duty of the arbitral tribunal to act fairly and impartiality as between the parties under the Act applies with regard to the arbitrator's decisions on costs. All parties must be given the opportunity of putting their case and responding to the case put to them on costs, irrespective of whether the substantive issues in dispute have already been decided by the tribunal. In practical terms, this means that a tribunal seated in London must either (i) request all parties to make submissions on costs before it issues a final award on liability and costs or (ii) bifurcate its decisions on liability and costs, to allow the parties to make cost submissions.

The decision also serves as a helpful reminder of the relatively short period of time for parties to challenge and appeal an arbitral award under the Act. Parties are therefore advised on receipt of an award to either make their application directly or seek an extension of time to make such application to ensure that their challenges are admissible.

For more information, please contact Chris Parker, Partner, Hannah Ambrose, Professional Support Consultant, Caroline Le Moullec, International Arbitration Intern, or your usual Herbert Smith Freehills contact.