ENGLISH COURT UPHOLDS S68 CHALLENGE TO ARBITRAL AWARD AND CRITICISES TRIBUNAL FOR TWO-YEAR DELAY

An arbitral award was recently challenged in the English High Court (the Court) in K v P [2019] EWHC 589 (Comm). In a rare example of a successful challenge under s68 of the Arbitration Act 1996, the Court held that (i) the tribunal had failed to deal with an issue put to it, and (ii) the Claimants had been denied the opportunity properly to present their case. The Court remitted the award back to the tribunal, notwithstanding its review of the tribunal's handling of the case and criticism of the two years taken to hand down its award.

Background

The arbitration concerned a Master Share Purchase Agreement (MSPA) by which the Respondents (the Sellers) had sold to the Claimants (the Buyers) the shares in two companies with agricultural interests and property in Ukraine.

The purchase price under the MSPA contained a price adjustment provision which depended on (a) the quantity of "Qualifying Land Leases" (QLLs) as defined in the MSPA at five "check-point" dates, and (b) the true state of indebtedness of the companies at 180 days following completion. The parties disputed the proper adjustment to the purchase price based on QLLs. The Buyers also brought claims under the MSPA for breach of warranty and an indemnity arising from undisclosed matters relating to the companies' indebtedness and assets, including a silo in disrepair (the Silo).

Following extensive written submissions and oral hearings, the arbitration proceedings closed in February 2016. The tribunal issued its award two years later in February 2018.

The Buyers challenged the award on the grounds of serious irregularity under section 68 of the Arbitration Act 1996 (the Act).

Failure to deal with issues (section 68(2)(d))

The Buyers argued that the tribunal had failed to deal with issues put to it, constituting "serious irregularity" under section 68 of the Act.

Under the MSPA, in order for a claim for breach of warranty or an indemnity to succeed, the resulting loss must have been "actually incurred and paid out". An issue in dispute in the arbitration was whether the requirement of "payment out" could be satisfied by the payment of the purchase price itself by the Buyers, or whether other payments or losses were required.

In its award, the tribunal had dismissed the Buyers' warranty claims, holding that the normal basis of damages for breach of warranty was the difference between the value of the item as warranted and its actual value. It also held that, since the parties had expressly required "payment out" in the contract, it was therefore necessary for the Buyers to have made payment in respect of any claim in order to make recovery. However, the award did not expressly address the argument made by the Buyers that payment of the purchase price itself under the MSPA might constitute "payment out".

Before the Court, the Sellers argued that the tribunal had implicitly determined this issue by holding that there could be no breach of warranty where the Buyers had not made any payment in relation to the claims. However, the Court disagreed. It would undoubtedly have constituted a failure to deal with an issue had the tribunal not determined whether a "payment out" was required at all. Having determined this, the tribunal should also have decided whether the requirement could be met by reference to the MSPA purchase price itself.

Consequently, the Court held that the tribunal had failed to deal with this issue and, since it might have come to a different conclusion had it done so, its failure constituted a serious irregularity causing substantial injustice. The judge remitted the issue back to the tribunal for reconsideration.

Buyers denied opportunity properly to present their case (sections 68(2)(a) and (c))

The Buyers also argued serious irregularity under sections 68(2)(a) and 68(2)(c) on the basis that they had been denied the opportunity properly to present their case.

QLL issue

During the arbitration hearing the Sellers had been allowed to put forward a new, higher figure for QLLs based on new evidence only adduced during the hearing. The tribunal eventually agreed with this argument in its award.

The Court held that the tribunal's decision to allow the Sellers' new case to be argued could not constitute a serious irregularity. The Buyers had had the opportunity to address the new case both during the hearing and in their post-hearing submissions. Furthermore, the Buyers had not applied to the tribunal to adduce their own responsive evidence, and the only arguments they had made relating to the admissibility of the evidence raised by the Sellers went towards the weight of evidence, not its exclusion.

Silo issue and Net Debt issue

The Buyers made two further arguments under section 68(2)(a) and (c).

It had been common ground between the parties that the loss flowing from any breach of warranty in relation to the Silo was represented by the cost of its reconstruction. However, the Sellers changed their position in their post-hearing submissions, arguing that, absent evidence of valuation of the shares purchased, no loss could be established. The tribunal accepted the Sellers' new argument in its award.

The Court held that the Buyers had been given no opportunity to counter the Sellers' new argument or adduce expert evidence on the valuation of shares since the post-hearing submissions were the last substantive submissions in the arbitration. As a consequence, the tribunal had failed to act fairly. Had the Buyers been given such opportunity, the tribunal might have come to a different conclusion on this breach of warranty claim. Therefore, there was a serious irregularity which had caused a substantial injustice.

Second, the Buyers argued that the tribunal had reached a ruling on an issue on the basis of arguments that had not been made by either party. The award stated that claims for breach of warranty in relation to undisclosed debts could only be pursued through a "Net Debt Adjustment mechanism" in the MSPA. However, this had not been part of the Sellers' case.

The Court held that the tribunal's conclusion was contrary to the parties' agreed position and had been reached without giving them notice. The Buyers had therefore had no opportunity to offer any counter-arguments. This accordingly amounted to a serious irregularity causing substantial injustice, since the tribunal might have reached a different conclusion had it acted fairly.

Both issues were remitted back to the tribunal for reconsideration.

Timing of the award

The tribunal handed down its award two years after the parties' final submissions. It was agreed between the parties that, whilst such a long delay might constitute a breach of the general duty of the tribunal under section 33 of the Act, this of itself did not cause a substantial injustice.

However, a number of the judge's comments indicate that a successful challenge might be possible on grounds of delay in other circumstances. Whilst he noted that the delay was partly due to a period of illness of one of the arbitrators, the judge still commented that it was "inordinate and unacceptable". He noted that such delay "can give rise to a suspicion that the Tribunal may have … forgotten what points were raised and required determination".

Furthermore, the judge made a number of references to the possibility that the award may in the end have been prepared hurriedly as a result of the delays and the arbitrator's illness. The Buyers had argued that the delay gave rise to a suspicion that the tribunal had sought, consciously or otherwise, to "effect a shortcut".

Comment

Under English arbitration law, the courts have an important supervisory role in ensuring that arbitration proceedings are conducted fairly and thoroughly by arbitral tribunals. However, the English courts have traditionally sought  to interfere as little as possible with the arbitral process. Indeed, the judge in this case noted that a court will only interfere in an "extreme case" where "the [tribunal's] conduct is so far removed from what could reasonably be expected from the arbitral process, that justice calls for it to be corrected". According to the judge, "a reasonably generous margin of appreciation is granted to arbitrators in the discharge of their functions".

However, aspects of the judgment show that the English courts will be robust in their supervision of arbitral tribunals when necessary. As noted above, the Court was openly critical of the tribunal in a number of respects, in particular on the delay in handing down the award. This case therefore demonstrates that, whilst the grounds for challenge may demand high threshold requirements, the English courts will not hesitate to intervene where these are met.

For more information, please contact Nicholas Peacock, Partner, Vanessa Naish, Professional Support Consultant, or your usual Herbert Smith Freehills contact.