ENGLISH COURT DISMISSES S68 CHALLENGE TO PROCEDURAL ORDER

In K v S [2019] EWHC 2386 (Comm), the English Court (the Court) dismissed a challenge to a London Court of International Arbitration (LCIA) arbitral tribunal's procedural order. The challenge was made on the grounds of serious irregularity under s68 of the Arbitration Act 1996 (the Act) but was dismissed for failing to satisfy any of the s68 requirements and for challenging a procedural order rather than an award. The judgment provides a clear indication of the parameters within which a s68 challenge may be brought.

Background

K was the Respondent and S was the Claimant in an arbitration under the LCIA rules about an Engineering, Procurement and Construction subcontract and alleged breaches of letters of termination.

K instructed a forensic accountant as an expert to identify "the causes of the collapse of K's business". The expert report produced concluded that S was largely responsible for the collapse of K's business and also provided an assessment of the quantum of losses.

S objected to the submission of the expert report, arguing that the issues addressed by the expert were not within the list of topics for expert evidence identified by the Tribunal and that the report was based on new factual and legal points that K had not pleaded or included in its witness statements. S sought to have the expert report withdrawn. K refused to do so alleging that the collapse of business point had been pleaded before and was within the list of topics for expert determination.

An application was made to the Tribunal and a hearing was held on the issue which resulted in the Tribunal reaching and issuing Procedural Order 5 (PO5). The Tribunal concluded that the report advanced a new claim which was not pleaded or sufficiently pleaded and should not be allowed in evidence.

K sought to challenge PO5 on the grounds of serious irregularity under s68 of the Act. K alleged that the decision not to allow the expert report to be admitted in the arbitration proceedings was not a legitimate exercise of the Tribunal's case management powers under s34 of the Act but an impermissible exclusion of material evidence and breach of the Tribunal's general duty under s33. Whilst K did not allege a failure of due process in the procedure by which the Tribunal made its decision, it was alleged that the decision itself led to a failure of due process because K was prevented from presenting its case on lost profits. K sought an order from the Court that the paragraphs of reasons in PO5 should be set aside or remitted to the Tribunal for reconsideration as to whether the expert report should be struck from the record. K also sought further directions regarding the exclusion of evidence in the arbitration.

Decision

In arriving at its decision to dismiss the challenge, the Court addressed multiple points which can be split into two categories. First, whether the Tribunal's decision in PO5 represented a "serious irregularity" and second, whether the decision was even an award capable of being challenged under s68 of the Act.

No Serious Irregularity

The Court reiterated that applications under s68 are not the appropriate vehicle for appeals on points of law or fact, or against procedural or case management decisions where there has been no procedural unfairness. In order to successfully bring a challenge under s68, there must be an irregularity which is serious, within the exhaustive s68(2) grounds for challenge, and has caused or will cause serious injustice. The only ground relied upon by K was the s68(2)(a) ground of failure by the Tribunal to comply with its general duty under s33. K argued that the Tribunal's exclusion of evidence on a material matter constituted misconduct under the law preceding the Act and this could be paralleled with a breach of s33. The Court disagreed. Whilst authorities under the preceding law may have some relevance in interpreting certain aspects of the Act, s68 and other parts of the Act which provide for challenges to awards replace the old law of misconduct and such authorities (including those relied upon by K) could not be used as direct authority for grounds to challenge decisions under s68.

It was further clarified that challenges made under s68 should be concerned only with due process. The Court could not take it upon itself to assess whether the Tribunal reached a correct decision in the exercise of its arbitral functions or in issuing PO5. It found that K was given every opportunity to put its case as to why it should be allowed to adduce the evidence and the Tribunal fairly considered and rejected both oral and written submissions. The Court also decided that there was no failure of due process on the part of the Tribunal and the exclusion of evidence was clearly within its case management powers. It was concluded that there was no irregularity, let alone serious irregularity, in reaching and issuing PO5.

Not an Award Capable of Being Challenged

In order to be subject to a challenge on grounds of serious irregularity under s68, the PO5 must have been an award within the meaning of the Act. All parties agreed that ZCCM Investments Holdings Plc v Kansanshi Holdings PLC and Kansanshi Mining PLC [2019] EWHC 1285 (Comm), covered in an earlier blog post, set out the relevant principles of what constitutes an award. In considering whether PO5 could be an award, the Court gave most weight to the question of whether there was a final determination on the merits of a substantive point in arbitration. PO5 did not decide a matter of substance and was simply a decision on procedural matters and could not, therefore, constitute an award capable of challenge under s68.

As the PO5 was a decision on procedural matters, the Court noted that K could have sought a procedural order, such as permission to amend its case, instead of challenging the decision on grounds of serious irregularity.

Comment

This case provides further guidance on bringing a s68 challenge and illustrates that successful challenges remain rare. It highlights that whether there has been a failure of due process is most important to a challenge based on serious irregularity and the old law which preceded the Act is of limited relevance to such a challenge. Authorities relating to the old law should, therefore, be relied upon with caution as they are likely to be of equally limited relevance.

Also of interest is the Court's clarification on how to determine if something is an award capable of challenge under s68. The Court considered the most important characteristic of an award to be a final determination on the merits of a substantive point in an arbitration. If there is doubt over whether a decision constitutes an award, it is advisable to explore other courses of action for responding to a decision before bringing a challenge under s68. For example, as advised by the Court in this case, where the relevant decision is procedural, seeking a further procedural order would be most appropriate. Bringing a challenge under s68 should be a last resort, and the case confirms once again that the bar is set very high to challenge an award successfully under s68.

For further information, please contact Craig Tevendale, Partner, or your usual Herbert Smith Freehills contact.