English Court rejects section 68 challenge on the primary ground that the Tribunal's decision was a Procedural Order and not an Award

In the recent case of ZCCM Investments Holdings PLC v Kansanshi Holdings PLC & Anor [2019] EWHC 1285 (Comm), the English Court (the Court) rejected a challenge under s.68 of the English Arbitration Act 1996 (the Act) and provided useful guidance on the test for determining whether a tribunal's decision qualifies as an award for the purpose of a s.68 challenge.

Background

The case related to funds owned by a mining company, Kansanshi Mining PLC (KMP). KMP was owned by ZCCM Investments Holdings PLC (ZCCM) and Kansanshi Holdings Limited (KHL), who respectively hold 20% and 80% of KMP's share capital. KHL controls the management of KMP and KHL is indirectly wholly owned by FQM Finance Limited (FQMF). ZCCM, on the other hand, is owned by the Republic of Zambia.

KMP made very significant transfers between 2006 and 2014 to FQMF (the Transfers), ultimately totalling US$2.238 Bn. The transfers were subsequently repaid to KMP in 2014-2015 with interest at 30-day LIBOR.  ZCCM initiated an ad hoc arbitration on behalf of KMP against KHL under the UNCITRAL Arbitration Rules 2010, claiming that in making the Transfers, KPM acted in breach of an Amended and Restated Shareholders' Agreement and of its fiduciary duties. ZCCM also made a claim in deceit, based on KHL’s alleged dishonest misrepresentations to ZCCM from 2007 onwards as to the nature of the Transfers. The applicable law was Zambian law (which incorporates the English common law principles which governed derivative claims before the English Companies Act 2006).

The Tribunal's Ruling

In view of KHL's control of KMP, ZCCM initiated the arbitration, making the claims on behalf of KMP. The claim was therefore brought as a derivative claim and it was common ground between the parties that ZCCM was required to seek the tribunal's permission to pursue the derivative claim.

The tribunal determined that in order to bring the derivative claim ZCCM was required to demonstrate that the derivative claim had a realistic prospect of success. Following a hearing, the tribunal issued a decision that ZCCM had not established that its derivative claim did in fact have a realistic prospect of success (the Ruling).

ZCCM's applications

ZCCM challenged the Ruling under s.68(2)(d) of the Act, arguing that there were serious irregularities due to the tribunal's failure to deal with five key issues, and under s.68(2(a), on the basis that the tribunal failed to comply with its general duty under s.33, by wrongly proceeding on the basis that an issue was not in dispute.

ZCCM also subsequently applied for permission to amend its initial s.68 challenge to include a new ground under s.68(2)(g), the award allegedly 'being obtained by fraud or the award or the way in which it was procured being contrary to public policy'. ZCCM was out of time to make this application and so also applied for an extension of time in this respect.

Procedural order or an award?

In order for ZCCM to be entitled to bring its s.68 challenge it had to be able to establish that the tribunal's Ruling was an award, as s.68 relates only to challenges to 'an award in the proceedings'.

The Court acknowledged that the relevant authorities do not set out any firm governing principles for distinguishing a procedural order from an award and that there was no previous identical case. However, the Court outlined the following relevant factors:

• real weight is given to the substance and not merely the form of the decision;
• a decision is more likely to be an award if it finally disposes of the matters submitted to arbitration, making the tribunal functus officio either entirely, or in relation to the particular issue or claim;
• the nature of the issues considered in the decision is significant, as substantive rights and liabilities of parties are likely to be dealt with in the form of an award. A decision dealing purely with procedural issues is less likely to be an award;
• the tribunal's description of the decision is relevant but not conclusive;
• the perception of a reasonable recipient of the tribunal's decision is relevant;
• that reasonable recipient is likely to take into account the objective attributes of the decision, including the tribunal's own description of the decision, the formality of the language and the level of detail in the reasoning and whether the decision complies with the formal requirements for an award under any applicable rules; and
• the reasonable recipient must be considered to have all the information the parties and tribunal would have had when the decision was made, including the background and context in the proceedings. This may include whether the tribunal intended to make an award.

Applying these factors, the Court decided that the Ruling was not an Award.  It found that it was essentially procedural in substance and that, while it did not deal with the sort of issues commonly found in a procedural order and it was final, it did not decide an issue of substance in relation to the claim. A derivative claim was a procedural device and this was a discretionary decision on a procedural issue. The substantive arbitration was not over and the tribunal was not functus.

Although the Ruling was not a simple procedural order (at 22 pages long), it was not in the form expected 'by way of Award in a multi-million pound multi-claim arbitration', which would very likely be much longer and more detailed. The Ruling did contain reasons, but this was consistent with the parties' expectations and, in any event, the reasons were 'somewhat compressed', which was more consistent with a Ruling on a complex procedural question.

The transcripts of the hearing showed that the form of the decision was raised by the tribunal and the parties made submissions on this point. KHL had asked for an award, while ZCCM had asked for a procedural order. The chair of the tribunal had expressed the preliminary view that a procedural order was appropriate. Given this debate, the Court determined it was 'overwhelmingly likely' that, (i) if the tribunal had intended to produce an award then it would have been called an award, and (ii) a reasonable recipient would also view the Ruling as an order with reasons, rather than as an award.

The Court therefore held that the Ruling was not an award and therefore no s. 68 challenge could be made.

Challenges on the Tribunal's approach to the issues

The Court indicated that in any event (even if the Ruling had been an award) the s.68(2)(a) and s.68(2)(d) challenges would have failed. While parts of the tribunal's wording was 'a little confusing', 'not very user friendly' and did 'not explain this reasoning as clearly as it might have done', there was no failure on the part of the tribunal to deal with the relevant issues. The tribunal had also not wrongly proceeded on the basis that an issue was not in dispute.

In addition, s.70 of the Act requires applicants to first exhaust all available arbitral appeal or review processes in order to succeed with a s.68 challenge. ZCCM had failed to apply to the tribunal for an additional award under the UNCITRAL rules (Article 39), as it should have done.

The fraud challenge

The basis of this challenge related to the way KMP had put the status of the Transfers to the Zambian Revenue Authority (ZRA) and alleged differences between this and what was argued in the arbitration. The application was out of time and the court emphasised that the merits of the challenge were a significant factor in determining whether an extension of time should be granted.

The Court determined that the disclosure of the ZRA correspondence would not have been likely to significantly affect the outcome of the arbitration. It was hard to say what the ZRA correspondence would have added to the material relevant to the key issues and any inconsistencies with the disclosed material were 'very slight'. The application for an extension of time therefore failed and the challenge under s.68(2)(g) would also fail, even if the Ruling had been an Award.

Comment

This case is a reminder of the importance of the dividing line between procedural orders and awards. Ambiguity in the status of particular decisions can arise, usually where (as in this case) it is not expressly stated by the tribunal whether a particular ruling has the status of a procedural order or an award.

The decision provides useful insight into how the English courts will approach questions of this kind. However, each case will ultimately be decided in light of its own particular circumstances. Given the potential difficulties where there is uncertainty, it is vital to seek to have decisions rendered as awards in circumstances where parties want to leave open any potential to seek future review of a tribunal's decision.

This case also demonstrates that, generally speaking, it remains difficult to show serious irregularity under s.68 of the Act. Awards with condensed reasoning, with certain issues covered relatively briefly (as in this case), will not be susceptible to review where it can be shown that the key issues in the case were nonetheless dealt with. In another recent case the Court gave best practice guidance for tribunals on avoiding challenges of this kind, noting the importance of the award listing all the issues in the case, even if it was not necessary to deal in detail with each issue. This latest case demonstrates the utility of that guidance.

For further information, please contact Chris Parker, Partner, Rebecca Warder, Professional Support Lawyer, or your usual Herbert Smith Freehills contact.