English Court upholds on paper dismissal of serious irregularity challenge with no prospects of success

The English High Court's decision in Asset Management Corporation Of Nigeria v Qatar National Bank [2018] EWHC 2218 (Comm), handed down in July 2018 but only recently published, concerned the court's dismissal on the papers of an application under section 68 of the Arbitration Act 1996 on the basis that the application had no reasonable prospect of success (available here: https://www.bailii.org/ew/cases/EWHC/Comm/2018/2218.html).

The decision serves as an example of the court employing the summary procedure to dismiss a section 68 application on the papers, but the drawn out process highlights the practical difficulties in quickly disposing of meritless applications.

Background

The underlying arbitration concerned a share sale contract between the Asset Management Corporation Of Nigeria ("AMCON"), the claimant in the arbitration and applicant in the section 68 application, and the Qatar National Bank ("QNB"), the respondent in the arbitration and section 68 application.

Pursuant to the contract, which was governed by Nigerian law, AMCON agreed to sell to QNB preference shares in Ecobank. The preference shares included an entitlement to a fixed amount of dividend equal to 4% of their issue price, with the option of receiving a higher amount by way of dividend if a higher figure was declared on the ordinary shares. The share sale was completed in 2014 and a preference dividend was paid by Ecobank in 2016.

The dispute between the parties centred on whether the preference dividend formed part of the rights sold by AMCON to QNB under the contract. If the preference dividend was due and owing at the time of completion in 2014, it fell outside the subject matter of the contract and remained the property of AMCON. If the preference dividend was not due and owing at the time of completion, it belonged to QNB. It was common ground that no preference dividend had been declared until 2016. The resolution of the dispute therefore turned on whether, on the proper construction of Ecobank's Articles of Association, a preference dividend needed to be declared by the board of Ecobank before it became due and owing.

In its award, the tribunal concluded "unhesitatingly" that on the proper construction of the relevant Article, which was "plain, clear and obvious", preference dividends only become due and owing when declared by Ecobank. It followed that QNB was entitled to the preference dividend declared and paid in 2016.

Applications to the English High Court

AMCON brought an application in the English High Court to set aside the tribunal's award under section 68(2)(d) of the Arbitration Act 1996, on the basis that the tribunal had failed to deal with all of the issues put to it, which resulted in AMCON suffering substantial injustice ("Section 68 Challenge"). The grounds of the Section 68 Challenge were as follows:

• Failure to apply relevant principles of Nigerian law;
• Failure to deal with AMCON's submissions on the relevance of a Nigerian statute to the construction of the relevant Article;
• Failure to deal with AMCON's submissions on the nature of the declaration of dividend required to satisfy the relevant Nigerian statute; and
• Failure to deal with AMCON's submissions on the nature of the preference dividend.

QNB brought an application under paragraph O8.5 of the Commercial Court Guide seeking orders that the Section 68 Challenge be dismissed on the papers. That paragraph of the Commercial Court Guide relevantly provides that:

"If the nature of the challenge itself or the evidence filed in support of it leads the Court to consider that the claim has no real prospect of success, the Court may exercise its powers under rule 3.3(4) and/or rule 23.8(c) to dismiss the application without a hearing… Where the Court makes an order dismissing the application without a hearing the applicant will have the right to apply to the Court to set aside the order and to seek directions for the hearing of the application. "

QNB's application was considered by Carr J, who dismissed the Section 68 Challenge on the papers after concluding that it had no prospect of success.

AMCON applied to Carr J to set aside her order dismissing the Section 68 Challenge, but AMCON's set aside application was also dismissed on the papers.

AMCON brought a further application in the High Court to set aside the two orders of Carr J. The matter came for hearing before Sir Jeremy Cooke.

Decision of the High Court

Following a hearing of AMCON's application to set aside Carr J's orders, the judge concluded that the Section 68 Application had no prospect of success, as did Carr J, and that AMCON's application must be dismissed.

In reaching this conclusion, the court found in respect of each of the four grounds of challenge that:

• The tribunal had dealt with the points, either expressly or impliedly; and
• In any event, the points advanced by AMCON were not "issues" within the meaning of section 68(2)(d). They were, at most, lines of argument in respect of an issue. The relevant "issue" was the proper construction of the relevant Article.

The court also considered that the tribunal's decision in respect of the first ground of challenge (application of Nigerian law) was substantively correct and, further, that this challenge was an attempt to appeal against a finding of fact, which was impermissible.

In the court's view, the Section 68 Challenge was wholly without merit and was "another example of a dissatisfied party to an arbitration seeking to challenge an Award in circumstances where statute does not allow it". The court noted that many judges have had cause to comment on this inappropriate use of section 68 in the past.

The court also made several comments on the procedure for dismissing unmeritorious challenges on the papers under paragraph O8.5 of the Commercial Court Guide:

• There is no reason why the court should not exercise its power for summary dismissal on the papers when the appropriate test is met, i.e. no real prospect of success.
• The court has tended to exercise the power more frequently over the years in light of the raft of unmeritorious applications made under section 68.
• For the most part, where a section 68 application is dismissed on the papers, the set aside application is infrequently pursued by the applicant (although the procedure provides for this possibility).
• Although the procedure only gives the applicant the right to apply to the court to set the order aside and "seek directions for the hearing of the application", the general practice is that a hearing will be granted to the applicant (if sought) unless the underlying application is seen as something akin to vexatious. The reason is that the court ordinarily proceeds by way of oral hearing so that the parties' positions can be advanced and tested in a manner not always so readily achievable on paper.

Comment

The court's robust decision to uphold a summary dismissal of an unmeritorious section 68 challenge is welcome.

However, the decision highlights the practical difficulties in disposing of bad challenges quickly and cheaply. Although the Section 68 Challenge was summarily dismissed on the papers, the dismissal prompted two further applications (to Carr J and Sir Jeremy Cooke) and an oral hearing. At the oral hearing, the court considered the merits of the Section 68 Challenge in some detail, including not only whether the points complained of were "issues" and whether they were dealt with, but also the correctness of the tribunal's findings in respect of one of the grounds. The right to apply to the court for a hearing after a challenge is rejected on paper is a safeguard built in to the summary dismissal process. In this judgment it is stated that an application for an oral hearing will ordinarily be granted unless the original application is something akin to vexatious – but this may result in the court effectively hearing a section 68 application as part of a process aimed at avoiding such hearings in the first place.

The court's increased willingness to exercise its powers to dismiss meritless section 68 challenges on the papers is a positive development, but the fact that such dismissed challenges may still end up before the court at an oral hearing reduces the efficacy of the summary procedure.

For more information, please contact Nick Peacock, Partner, Aaron McDonald, Senior Associate, or your usual Herbert Smith Freehills contact.