English court sets aside arbitration award for serious irregularity due to tribunal's non-disclosure of novel point central to award

The odds of successfully challenging an arbitral award in the English Courts on the basis of s68 of the Arbitration Act 1996 (serious irregularity) remain low. In the recent past over 95% of s68 challenges have been unsuccessful and in the period from 2015 to 2017 only 3 out of 112 s68 appeals succeeded, approximately 2.7% of applications made.

However, the English High Court has recently set aside an arbitral award for serious irregularity under s68(2)(a) in the case of RJ and another v HB [2018] EWHC 2833 (Comm). This case is a relatively rare and interesting example of a successful s68(2)(a) challenge.

Background

The parties to the dispute had entered into various agreements under which, ultimately, HB agreed to transfer shares in a bank to RJ (or an RJ affiliate) in exchange for a Euro sum then equivalent to US$75 million. There was no share transfer and HB alleged that RJ and RJ's corporate vehicle (L Ltd) had failed to take steps to obtain the regulatory approval needed to accept the transfer. As a result, HB brought arbitration proceedings against RJ and L Ltd, seeking to force RJ to (at least) take required steps towards effecting the agreed share transfer.

The sole arbitrator, "a very senior English QC, well known and highly regarded in the world of international commercial arbitration", initially handed down a partial award setting out his first findings, on the basis of which he invited the parties to settle their disputes.

The parties failed to reach a settlement agreement and the arbitrator then made a final award declaring that:

• RJ and L Ltd were in breach of the share transfer agreements between the parties.
• RJ was the beneficial owner of the bank shares HB had purchased.

The s68 challenge

RJ and L Ltd applied to the English Court to have the award set aside, on the basis that the decision declaring RJ to be the beneficial owner of the shares was affected by a serious irregularity.

The applicants successfully argued that the order ultimately made, that RJ was the beneficial owner of the shares held by HB, had not been sought by any of the parties to the dispute. The possibility that this was the proper share ownership structure had never been raised by the arbitrator at any stage. As a result the parties were never given an opportunity to consider or to deal with this new point.

There had been three exchanges during oral closing submissions which could be read "as a hint that something like what became [the Award] may have been starting to go through the Arbitrator's mind", but the Court decided these were not enough to put the parties on notice that the arbitrator was contemplating the entirely novel point.

The Court's reasoning on the serious irregularity point pivots on the well-established position that arbitrators should request parties' views when introducing a novel point in a dispute, as summarised in Zermalt Holdings SA v. NuLife Upholstery Repairs Ltd [1985] 2 EGLR 14:

"[i]f an arbitrator is impressed by a point that has never been raised by either side, then it is his duty to put it to them so that they have an opportunity to comment. If he feels that the proper approach is one that has not been explored or advanced in evidence or submission, then again it is his duty to give the parties a chance to comment…It is not right that his decision should be based on specific matters which the parties have never had the chance to deal with. Nor is it right that a party should first learn of adverse points in a decision against him. That is contrary both to the substance of justice and to its appearance".

The Court decided that the tribunal in this case had dealt with the dispute on a significantly different basis to the submissions of the parties, had failed to draw the new point to the attention of the parties, and had therefore failed to allow them to make submissions on the new point.

The award had created substantial injustice, as RJ was declared to beneficially own a large minority bank shareholding that he did not want, for which he did not have the required regulatory approval, which would expose him to a real risk of regulatory fines, and which he might be forced to continue owning for a significant period of time.

Despite setting aside the award, the Court refused to remove the arbitrator, highlighting the difficulty of obtaining removal of an arbitrator even in cases of clear irregularity. The judgment contains an interesting discussion of whether the right to remove an arbitrator arises under s68 itself and suggests that an additional s24 application is in fact required in order to achieve removal.

Comment

This rare successful s68 challenge demonstrates that the English Courts will be prepared to intervene in the outcome of arbitral proceedings where there is clear and serious irregularity causing substantial injustice. While the decision is of legal interest, it is unlikely that there will be any change to the English Courts' pro-arbitration and anti-interference stance, or the usual very high threshold for succeeding on a s68 challenge.

The case is another reminder of the difficulty inherent in an application to remove an arbitrator, even where a party is able to establish serious irregularity and succeeds in remitting the award to the tribunal, or having it set aside. When applying to remove an arbitrator as part of a s68 application, it would be wise to also make a s24 application. However, if there is no suggestion that the arbitrator has acted inappropriately, then applicants must get over the significant hurdle of showing that the arbitrator would not be able to approach rewriting the award with an open mind. In most cases this is likely to prove difficult.

For more information, please contact Nicholas Peacock, Partner, Rebecca Warder, Professional Support Lawyer, or your usual Herbert Smith Freehills contact.